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Full text of "Accounting establishment: a staff study"

94th Congress 
2d Session 



COMMITTEE PRINT 



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THE ACCOUNTING ESTA 



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A STAFF STUDY 



PREPARED BY THE 



SUBCOMMITTEE ON REPORTS, ACCOUNTING 
AND MANAGEMENT 



OF THE 



COMMITTEE ON GOVERNMENT OPERATIONS 

UNITED STATES SENATE 




DECEMBER 1076 



Printed for the use of the Committee on Government Operations 



94 o? £ on F ess \ COMMITTEE PRINT 

2d Session J 



THE ACCOUNTING ESTABLISHMENT 



A STAFF STUDY 



PREPARED BY THE 

SUBCOMMITTEE ON REPORTS, ACCOUNTING 
AND MANAGEMENT 

OF THE 

COMMITTEE ON GOVERNMENT OPERATIONS 

UNITED STATES SENATE 




DECEMBER 1976 



Printed for the use of the Committee on Government Operations 



U.S. GOVERNMENT PRINTING OFFICE 
67-159 WASHINGTON : 1976 



For sale by the Superintendent of Documents, U.S. Government Printing Office 
Washington, D.C. 20402 - Price $12 



COMMITTEE ON GOVERNMENT OPERATIONS 
ABRAHAM RIBICOFF, Connecticut, Chairman 



JOHN L. McCLELLAN, Arkansas 
HENRY M. JACKSON, Washington 
EDMUND S. MUSKIE, Maine 
LEE METCALF, Montana 
JAMES B. ALLEN, Alabama 
LAWTON CHILES, Florida 
SAM NUNN, Georgia 
JOHN GLENN, Ohio 



CHARLES H. PERCY, Illinois 
JACOB K. JAVITS, New York 
WILLIAM V. ROTH, Jr., Delaware 
BILL BROCK, Tennessee 
LOWELL P. WEICKER, Jr.. Connecticut 



Richard A. Wegman, Chief Counsel and Staff Director 

Paul Hoff, Counsel 

Eli E. Nobleman, Counsel 

David R. Schaefer, Counsel 

Matthew Schneider, Counsel 

Fred Asselin, Investigator 

Ellen S. Miller, Professional Staff Member 

John B. Childers, Chief Counsel to the Minority 

Brian Conboy, Special Counsel to the Minority 

Marilyn A. Harris, Chief Clerk 

Elizabeth A. Preast, Assistant Chief Clerk 

Harold C. Anderson, Staff Editor 



Subcommittee on Reports, Accounting and Management 

LEE METCALF, Montana, Chairman 

JOHN L. McCLELLAN, Arkansas BILL BROCK, Tennessee 

EDMUND S. MUSKIE, Maine CHARLES H. PERCY, Illinois 

SAM NUNN, Georgia LOWELL P. WEICKER, Jr., Connecticut 

JOHN GLENN, Ohio 

Vic Reinemer, Staff Director 

E. Winslow Turner, Chief Counsel 

John B. Chesson, Counsel 

Gerald Sturges, Professional Staff Member 

Lyle Ryter, Minority Counsel 

James George, Professional Staff Member 

Jeanne A. McNaughton, Chief Clerk 

Anne Boni, Assistant Chief Clerk 

Jane Woods, Editor 

Peter Intermaggio, Research Assistant 



(ID 



ABRAHAM RIBICOFF, CONN.. CHAIRMAN SUBCOMMITTEE: 

JOHN L. MCCLELLAN, ARK. CHARLES H. rERCY. ILL. LEE METCALF, MONT., CHAIRMAN 

HENRY M. JACKSON, WASH. JACOB K. JAVITS. N.Y. JOHN L. MC CLELLAN, ARK. BILL BROCK, TENN. 

EDMUND S. MUSKIE, MAINE WILLIAM V. ROTH, JR., DEL, EDMUND t. MUSKIE, MAINE 

LEE METCALF, MONT. BILL BROCK, TENN. SAM NUNN, GA. 

JAMES B. ALLEN, ALA. LOWELL F. WEICXER, JR.. CONN. jOHH GLENN, OHIO 

LAWTON CHILES, FLA. 



VIC RE1NEMER, STAFF DIRECTOR 



^c^tr^^t^.n.crc QlCnitcb J&laUsi J&erxaU w^™ 

COMMITTEE ON 

GOVERNMENT OPERATIONS 

SUBCOMMITTEE ON REPORTS, 

ACCOUNTING. AND MANAGEMENT 

(PURSUANT TO SEC. 7. 9. RES. 143. MTH CONGRESS) 

WASHINGTON. DC. 20310 

7 December 1976 



The Honorable Abraham Ribicoff 

Chairman 

Senate Government Operations Committee 

Washington, D.C. 20510 

Dear Chairman Ribicoff: 

Late last year, this subcommittee began a study of the 
Federal government's role in establishing accounting practices 
which are used by publicly -owned corporations in reporting 
financial and other information to the public. The study 
was precipitated by continual revelations of previously un- 
reported wrongdoing by major corporations, as well as a series 
of corporate failures and financial difficulties which have 
come to light in recent years. In many cases, the problems 
which occurred were caused or aggravated by the use of accounting 
practices that failed to reflect accurately the substance of 
corporate business activities. 

Congress and the public have a very real interest in 
assuring that information reported by corporations is both 
meaningful and accurate. Accounting practices are instrumental 
in achieving that result because they control the manner in 
which corporate financial information is presented and checked 
for accuracy. Corporations presently have substantial dis- 
cretion in choosing among alternative accounting standards 
to report similar business transactions. As a result, the 
amounts of earnings or losses reported to the public can vary 
drastically depending on which accounting alternatives are 
chosen. 

Congress recognized the importance of accounting practices 
to achieving meaningful corporate disclosure in the Federal 
securities laws which were enacted more than 40 years ago. 

(HI) 



(IV) 

The Honorable Abraham Ribicoff 
Page Two 

The Securities and Exchange Commission was given broad authority 
to establish accounting practices as part of its mandate to 
protect the public from false and misleading information re- 
garding the activities of publicly-owned corporations. The 
SEC's failure to exercise its authority on accounting matters 
has led to many of the problems which have caused a serious 
erosion of public confidence in the accuracy and usefulness 
of information reported by corporations. 

I am transmitting to you the completed study by the 
subcommittee staff, which is entitled "The Accounting 
Establishment" after an apt characterization by the chairman 
of the Financial Accounting Standards Board. The major pur- 
pose of this study is to provide Congress and the public with 
an understanding of the various private organizations and 
Federal agencies involved in establishing and administering 
accounting practices which have substantial impact on Federal 
policies and programs, as well as private economic decisions. 

In the course of preparing this study, the subcommittee 
found it necessary to request certain information directly 
from the organizations and agencies involved in establishing 
accounting practices because relevant factual data was not 
readily available to Congress and the public. Thus, the 
study and its appendices provide a useful and convenient re- 
ference concerning the identities and activities of those 
organizations and agencies comprising the accounting establish- 
ment. Such a comprehensive reference on this important area 
of public policy and controversy is long overdue. 

I believe the findings of this study should be of con- 
cern to every Member of Congress who believes that the suc- 
cess of our competitive economy depends upon the free flow 
of accurate and meaningful information regarding the activities 
of its major participants -- the publicly-owned corporations 
which provide much of the Nation's goods and services. Congress 
has established as a national policy that a proper role for 
the Federal government should be to ensure the free flow of 
such information, but that goal has not been adequately ful- 
filled. This study explains some of the primary reasons 
why adequate corporate disclosure has not been achieved. 



(V) 

The Honorable Abraham Ribicoff 
Page Three 

In particular, I am disturbed by two of the study's 
major findings. The first is the extraordinary manner in 
which the SEC has insisted upon delegating its public authority 
and responsibilities on accounting matters to private groups 
with obvious self-interests in the resolution of such 
matters. The second is the alarming lack of independence 
and lack of dedication to public protection shown by the 
large accounting firms which perform the key function of in- 
dependently certifying the financial information reported by 
major corporations to the public. 

Based upon its analysis of all the information reviewed 
during the course of this study, the subcommittee staff has 
prepared several recommendations which are designed to restore 
public confidence in the integrity and usefulness of corporate 
financial reports, and help fulfill the intent of the Federal 
securities laws. I believe those recommendations serve as 
sound guidelines for action by Congress to achieve necessary 
reforms of accounting practices. I also note that this study 
and its recommendations complement the work being done by other 
committees within the House and Senate on regulatory reform 
and corporate disclosure. 

Interest in this subcommittee's work by the accounting 
profession, the business community, the academic community, 
and Federal agencies concerned with accounting matters indicates 
there will be widespread interest in this study outside of 
Congress. Therefore, I ask that the study be issued as a 
committee print. 

The voluntary cooperation of the major accounting firms, 
private accounting and business organizations, and Federal 
agencies which provided information to the subcommittee is 
appreciated. 



Very^ruly yours, 




Digitized by the Internet Archive 

in 2013 



http://archive.org/details/accstablOOunit 



GLOSSAKY 

Accountant. — An accountant is a qualified person who performs 
auditing and accounting services. Accountant is generally used as a 
synonym for CPA in this study. 

Accounting and Accounting Standards. — Accounting involves the 
principles and practice of systematically recording, interpreting, and 
presenting financial information. Accounting standards are the prin- 
ciples or methods that govern the manner in which financial informa- 
tion may be presented. 

Accounting Series Release. — Accounting series releases are policy 
statements and administrative actions on accounting matters which 
are issued by the SEC. 

American Accounting Association. — The American Accounting As- 
sociation is a professional organization which primarily represents 
the interests of academic accountants. It is one of the private group? 
sponsoring the FASB. 

Auditing and Auditing Standards. — Auditing involves the periodic 
examination of financial statements and checking of business records 
to verify their accuracy. Auditing standards govern the manner in 
which audits should be conducted. 

AW PA. — AICPA is the abbreviation for American Institute of 
Certified Public Accountants, the largest professional association of 
CPAs. The AICPA is one of the private groups sponsoring the 
FASB. 

OASB. — CASB is the abbreviation for Cost Accounting Standards 
Board, a Federal board established to promulgate cost accounting 
standards for use by contractors with the Federal Government. 

Cost Accounting Standards. — Cost accounting standards are used 
to measure and allocate costs under contracts. 

CPA. — CPA is the abbreviation for certified public accountant. 
Such accountants are certified by State examining boards as having 
met the requirements of State laws regarding certain qualifications 
to practice accounting. CPAs may serve as independent auditors for 
publicly-owned corporations. 

"Creative Accounting". — The term "creative accounting" is widely 
used to describe accepted accounting techniques which permit busi- 
nesses to report financial results that may not accurately portray the 
substance of their business activities. 

FAF. — FAF is the abbreviation for the Financial Accounting 
Foundation, which ig the non-profit corporation formed to operate 
the FASB organization. 

FAS AC. — FASAC is the abbreviation for the Financial Account- 
ing Standards Advisory Council, a part of the FASB organization 
intonrlpd to provide outside advice to the FASB. 

FASB. — FASB is the abbreviation for the Financial Accounting 
Standards Board, which is the private body created to establish 
accounting standards. 

(VII) 



VIII 

Financial Accounting Standards. — Financial accounting standards 
govern the presentation of financial information by publicly-owned 
corporations 'and other businesses to investors, creditors, and the 
public. 

Financial Analysts Federation. — The Financial Analysts Federa- 
tion is a professional association of securities analysts. It is one of the 
private groups sponsoring the FASB. 

Financial Executives Institute. — The Financial Executives Insti- 
tute is an orgjnization that promotes corporate business interests. It is 
one of the private groups sponsoring the FASB. 

GAAP. — GAAP is the abbreviation for generally accepted account- 
ing principles, which comprise the collection of accounting standards 
presently available for use in reporting financial information of pub- 
licly-owned corporations and other businesses. 

GAAS. — GAAS is the abbreviation for generally accepted auditing 
standards, which are the standards presently used to guide independent 
auditors in checking the business records of publicly-owned corpora- 
tions and other businesses for accuracy and consistency. 

Independent Auditor. — Independent auditor, as used in this study, 
is the designation for a CPA or other qualified accountant who inde- 
pendently certifies the accuracy of corporate financial information 
under the provisions of the Federal securities laws. When acting as 
the independent auditor of a publicly-owned corporation, an account- 
ant has public responsibilities and must satisfy requirements of the 
Federal Government regarding performance of those responsibilities. 

NASBA. — NASBA is the abbreviation for National Association of 
State oBards of Accountancy, an organization purporting to represent 
State boards which license CPAs. 

National Association of Accountants. — The National Association of 
Accountants is an organization representing businessman and account- 
ants. It is one of the private groups sponsoring the FASB. 

Partners.- — Because most accounting firms are organized as business 
partnerships, partners in such firms are responsible for the firms' ac- 
tivities and receive a share of the firms' profits. 

"Principals". — "Principals" are persons associated with accounting 
firms who are not CPAs, but provide senior level expertise in the per- 
formance of non-accounting services such as management advisory 
services. Responsibilities and financial remuneration of "principals" 
are generally comparable to those of partners with similar authority. 

Practice of Accounting. — Practitioners or practicing accountants 
are those who provide professional services to clients on a fee basis, as 
distinguished from accountants who are employed by businesses, gov- 
ernments, or as academics. 

Publicly -Owned Corporations. — As used in this study, publicly- 
owned corporations are those required to report information under the 
Federal securities laws. Such corporations generally have publicly 
traded securities and diversified ownership, and comprise the vast 
majority of the Nation's sizable corporations. 

SE&—8EG is the abbreviation for Securities and Exchange Com- 
mission, the Federal agency charged with administration and enforce- 
ment of the Federal securities laws. 



CONTENTS 



Page 

Letter of Transmittal III 

Glossary VII 

Summary 1 

The "Big Eight" Accounting Firms 4 

The American Institute of Certified Public Accountants 9 

The Financial Accounting Foundation 13 

The Financial Accounting Standards Board 15 

The Securities and Exchange Commission 17 

The "Big Eight" Accounting Firms and Their Corporate Clients 19 

Recommendations 20 

Chapter I. The "Big Eight" accounting firms 25 

Introduction 25 

Subcommittee requests for information 27 

Other information on the "Big Eight" accounting firms 29 

Size of the "Big Eight" accounting firms 29 

Services offered by the "Big Eight''* accounting firms 32 

Auditing and accounting services 33 

Tax services 33 

Management advisory services . 34 

Concentration of major corporate clients among the "Big Eight" 

accounting firms 35 

CRS methodology 36 

Powers and responsibilities of independent auditors 37 

CRS findings 38 

Effects of concentration 43 

Profitability of the "Big Eight" accounting firms 46 

Independence of the "Big Eight" accounting firms 48 

Management advisory services 50 

Tax services 52 

Representation of clients' interests 52 

Illustrative questionable activities of individual "Big Eight" accoant- 

ing firms 54 

Arthur Andersen & Co 55 

Arthur Young & Co 57 

Coopers & Lybrand 59 

Ernst & Ernst 60 

Haskins & Sells 61 

Peat, Marwick, Mitchell & Co 62 

Price Waterhouse & Co 63 

Touche Ross & Co 64 

Influence of the "Big Eight" accounting firms on Federal, State, and 

local governments 64 

Quality of practice by "Big Eight" accounting firms 67 

Chapter II. Organization of the American Institute of Certified Public 

Accountants (AICPA) 70 

Introduction 70 

Council 71 

Officers 73 

Elected members 74 

Members at large 75 

Board of directors 75 

Past presidents and board chairmen 76 

Designated State representatives 76 

(IX) 



Chapter II — Continued Page 

Nominations Committee 77 

Board of directors 77 

Committees and boards 78 

Senior committees 79 

Accounting Standards Executive Committee 79 

Auditing Standards Executive Committee 79 

Board of Examiners 79 

Federal Taxation Executive Commit tee 80 

Management Advisory Services Executive Committee 80 

Practice Review Committee 80 

Continuing Professional Education Executive Committee. _ 81 

Professional Ethics Executive Committee 81 

Senior technical committees 81 

Joint Trial Board and other permanent committees 81 

Joint Trial Board 82 

Advisory committees 83 

Chapter III. Influence of the "Big Eight" accounting firms in the AICPA_ 85 

Introduction 85 

Nominations Committee 87 

Board of directors 87 

Committees 87 

Senior technical committees 88 

Accounting Standards Executive Committee 89 

Auditing Standards Executive Committee 90 

Federal Taxation Executive Committee 92 

Management Advisory Services Executive Committee 92 

Professional Ethics Executive Committee 93 

AICPA committees involved with the Federal Government 94 

Cost Accounting Standards Board Committee 94 

Federal Government Executive Committee 95 

Federal Taxation Executive Committee 96 

SEC Regulations Committee 97 

Other major AICPA committees 97 

Advisory committees 99 

Summary 99 

Chapter IV. Activities of the AICPA 101 

Introduction 101 

Political program 103 

Influencing Federal tax policy 106 

Other congressional lobbying 107 

Liaison with the Cost Accounting Standards Board 109 

Liaison with the Securities and Exchange Commission * 111 

Self regulation 114 

The "materiality" standard 117 

Study commissions 118 

The Cohen commission 119 

Accounting Research Association 120 

FASB advocate 121 

Management advisory services 122 

Periodicals and publications 122 

Uniform CPA examination 122 

National Association of State Boards of Accountancy 122 

Professional ethics enforcement 125 

Public spokesman 126 

Summary 129 

Chapter V. The Financial Accounting Standards Board (FASB) and 

related organization 130 

Introduction 130 

Evolution of standard-setting 131 

The SEC's "substantial authoritative support" test 134 

Organizational structure 135 

Financial Accounting Foundation (FAF) 138 

Financial Accounting Standards Board (FASB) 142 

Financial Accounting Standards Advisory Council (FASAC) 146 

Policies to prevent conflicts of interest on the FASB 147 

'Material" investments 151 



<( ■ 



XI 

Chapter VI. Influence of the AICPA and the "Big Eight" accounting Page 

firms on the FASB 153 

Money 153 

Personnel 155 

Organizational support 156 

Summary 157 

Chapter VII. Influence of the other private sponsoring groups on the 

FASB 158 

Financial Executives Institute 159 

National Association of Accountants 161 

American Accounting Association 162 

Financial Analysts Federation 164 

Chapter VIII. Activities of the FASB 165 

Private meetings 165 

Public statements 167 

Lobbying 168 

Accounting standards 170 

Chapter IX. Accounting responsibilities of the Securities and Exchange 

Commission . 173 

Authority and responsibility 173 

Accounting Series Release 150 176 

Relationship with the~AiCPA~anoTthe" FASB_\\~r"I l~.ll " " V. "" 179 

Enforcement of professional standards 180 

"Hochfelder" decision 182 

Chapter X. The Cost Accounting Standards Board (CASB) 184 

Organization and resources 184 

Relationship with the FASB and its sponsors 185 

Standards 186 

Chapter XL Examples of the need for accounting and auditing reforms __ 188 

"Creative accounting" 188 

APPENDIX A— QUESTIONNAIRE TO "BIG EIGHT" 
ACCOUNTING FIRMS AND RESPONSES 

Letter and questionnaire from Senator Metcalf to managing partners of 

"Big Eight" accounting firms, December 19, 1975 191 

ARTHUR ANDERSEN & CO. 

Letter and enclosure from Harvey Kapnick, managing partner, Arthur 

Andersen & Co., January 7, 1976 196 

Excerpt from Arthur Andersen & Co.'s August 31, 1975 "Annual Report to 

our Worldwide Organization" 200 

Letter and enclosure from G. E. Stanton, vice chairman-administration, 

Arthur Andersen & Co., January 29, 1976 208 

ARTHUR YOUNG * CO. 

Letter and enclosure from William S. Kanaga, managing partner, Arthur 

Young & Co., February 20, 1976 232 

COOPERS A LYBRAND 

Letter from Philip L. Defliese, managing partner, Coopers & Lybrand, 

January 13, 1976 254 

Letter from Senator Metcalf to Mr. Defliese, January 20, 1976 256 

Letter and enclosure from Mr. Defliese, February 19, 1976 258 

Letter from Senator Metcalf to Mr. Defliese, March 1, 1976 288 

Letter from Mr. Defliese to Senator Metcalf, March 26, 1976 289 

ERNST A ERNST 

Letter and enclosure from R. T. Baker, managing partner, Ernst & Ernst, 

February 12, 1976 290 



XII 



HASKINS A SELLS 



Letter and enclosure from Michael N. Chetkovich, managing partner, ^ a ee 

Haskins & Sells, February 17, 1976 305 

PEAT, MARWICK, MITCHELL & CO. 

Letter and enclosure from Walter E. Hanson, senior partner, Peat, Mar- 
wick, Mitchell & Co., January 23, 1976 324 

Letter from Senator Metcalf requesting clarification of January 23 letter 

and enclosure, January 30, 1976 335 

Response from Mr. Hanson, March 8, 1976 337 

PRICE WATERHOUSE A CO. 

Letter from John C. Biegler, managing partner, Price Waterhouse & Co., 

December 30, 1975 339 

Letter and enclosure from Mr. Biegler, February 18, 1976 342 

TOUCHE ROSS & CO. 

Letter and enclosure from Russell E. Palmer, managing partner, Touche 

Ross & Co., February 20, 1976 380 

Letter from Senator Metcalf to Mr. Palmer, March 1, 1976 404 

Letter from Mr. Palmer to Senator Metcalf, March 15, 1976 406 

APPENDIX B— NYSE AND AMSE CLIENTS OF THE "BIG 
EIGHT" ACCOUNTING FIRMS: SUMMARY FINANCIAL 
AND EMPLOYMENT DATA 

(A Library of Congress, Congressional Research Service study by John Spriggs 

economic analyst, Economics Division.) 

Title page 407 

Table of contents 409 

Background and scope 411 

Summary of financial and employment data 413 

Table 1 — Summary of clients' financial and employment data 417 

Table 1 A — Number of valid entries for data category 418 

Clients listed on the NYSE and AMSE 419 

Figure 1— Number of clients— NYSE and AMSE 421 

Figure 2 — Percentage of all companies listed on the exchanges 422 

Clients' financial and employment data 423 

Figure 3— Sales of clients— NYSE and AMSE 425 

Figure 4 — Percentage of sales of all companies listed on the exchanges - 426 

Figure 5 — Net income of clients— N YSE and AMSE 427 

Figure 6 — Percentage of net income of all companies listed on the ex- 
changes 428 

Figure 7 — Income taxes of clients— NYSE and AMSE 429 

Figure 8 — Percentage of income taxes of all companies listed on the ex- 
changes 430 

Figure 9 — Number of employees of clients — NYSE and AMSE 431 

Figure 10 — Percentage of employees of all companies listed on the ex- 
changes 432 

Figure 11— Assets of clients— NYSE and AMSE 433 

Figure 12 — Percentage of total assets of companies listed on the exchanges. 434 

Fifty largest clients 435 

Table 2— Ranked by sales 437 

Table 3 — Ranked by net income 438 

Table 4 — Ranked by income taxes 439 

Table 5 — Ranked by employees 440 

Table 6 — Ranked by assets 441 

CPA firms in selected industries 442 

Table 7 — Natural resources and banks 444 

Table 8 — Chemicals and drugs and pharmaceuticals 445 

Table 9 — Machinery and equipment and electric power companies — 446 



xni 

Page 

Summary 447 

Attachment 1 — "Big Eight" accounting firms : 

Financial and employment data of clients 448 

Price Waterhouse & Co 448 

Arthur Andersen & Co 462 

Coopers & Lybrand 478 

Haskins & Sells 488 

Peat, Marwick, Mitchell & Co 498 

Arthur Young & Co 512 

Ernst & Ernst 520 

Touche Ross & Co 532 

Clients of other firms 540 

Attachment 2 — List of organizations occurring on more than one client 

list 559 

Attachment 3 — List of organizations with no financial data 560 

APPENDIX C— "BIG EIGHT" FIRMS' TESTIMONY AND PRES- 
ENTATIONS BEFORE CONGRESS, STATE LEGISLATURES 
AND REGULATORY COMMISSIONS 

Letter from Senator Metcalf to managing partners of "Big Eight" account- 
ing firms regarding their testimony and presentations, since January 
1975, before Congress, State legislatures and regulatory commissions, 
April 8, 1976 569 

ARTHUR ANDERSEN & CO. 

Response to April 8 letter from G. E. Stanton, vice chairman, administra- 
tion, Arthur Andersen & Co., April 30, 1976 571 

Further response to April 8 letter from G. E. Stanton, vice chairman, 

administration, Arthur Andersen & Co., May 28, 1976 594 

Statement of Thomas A. Sampson, vice president, Greater Boston Chamber 
of Commerce, and managing partner of Arthur Andersen & Co. in Boston, 
regarding the initiative petition to create a Massachusetts Public Power 
Authority, February 19, 1975 622 

Summary statement of Arthur Andersen & Co. before the Committee on 
Ways and Means, U.S. House of Representatives, "Taxation of Inter- 
national Business by the United States — The Competitive Aspects of 
Proposed Major Changes in the System," July 15, 1975 624 

Excerpt from testimony by Randall B. McDonald (Arthur Andersen & Co.) 
and Robert E. Field (Price Waterhouse & Co.) before the Special Sub- 
committee on Integrated Oil Operations, Committee on Interior and 
Insular Affairs, U.S. Senate, 93d Congress, 2d session, "Market Per- 
formance and Competition in the Petroleum Industry," February 21, 
1974 632 

Findings and opinion accepting waiver consent and imposing remedial 
sanctions by Securities and Exchange Commission in the matter of 
Arthur Andersen & Co., July 8, 1974 638 

Article in Wall Street Journal regarding Arthur Andersen's "Public Re- 
view" Board, October 12, 1975 648 

Article in New York Times regarding Arthur Andersen and Merck & Co., 
^ March 10, 1976 649 

Executive News Briefs, published by Arthur Andersen & Co., regarding 

firm's petition to SEC, June 1976 650 

Executive News Briefs, published by Arthur Andersen & Co., regarding 

reaction in the accounting profession to SEC petition, June 1976 654 

Article in Wall Street Journal regarding Arthur Andersen's protest of the 

SEC's policy on accounting rules, June 22, 1976 656 

Article in Wall Street Journal regarding Arthur Andersen's challenge of 

FASB, June 24, 1976 657 



XIV 



ARTHUR YOUNG & CO. 



Response to April 8, 1976 letter from Alan S. Berk, Arthur Young & Co., "Page 
May 10, 1976 658 

Article by David Burnham, New York Times, regarding Arthur Young & 
Co.- American Medical Association plan for recruitment of physicians 
for Federal advisory committees, June 29, 1975 662 

Forbes magazine interview with Arthur Young & Co.'s managing partner, 

New York office, May 15, 1976 663 

Article in New York Times about lack of guidelines regarding bribery of 

foreign government officials, December 5, 1975 664 

Article in Wall Street Journal about Arthur Young & Co. passing money 
for foreign government officials on behalf of Pullman Inc., October 25, 
1976 665 

COOPERS & LYBRAND 

Response to April 8, 1976 letter from Philip L. Defliese, managing partner, 

Coopers & Lybrand, May 4, 1976 666 

Coopers & Lybrand comment to FPC in Docket No. RM75-27, regarding 

allowance for funds during construction, September 4, 1975 669 

Coopers & Lybrand comment on FPC Order No. 530 regarding normaliza- 
tion of utility taxes, November 26, 1975 674 

ERNST & ERNST 

Response to April 8, 1976 letter from R. T. Baker, managing partner, 

Ernst& Ernst, May 19, 1976 686 

Letter from Ernst & Ernst regarding fuel adjustment charges to H. Clyde 
Reeves, chairman, Special Advisory Commission, electrical utility rates 
and regulation, Frankfort, Ky., November 14, 1975 692 

Letter from Ernst & Ernst regarding cost of money as an element of the 
cost of facilities capital to Mr. Arthur Schoenhaut, executive secretary, 
CASB, April 26, 1976 695 

Article by Paul Valentine in Washington Post regarding congressional 

review of Ernst & Ernst audit procedures, September 16, 1972 698 

Article by Paul Valentine in Washington Post regarding Ernst & Ernst's 

record as police consultants, October 26, 1972 699 

Article in Wall Street Journal regarding Ernst & Ernst's proposal to adopt 

simple form of "inflation accounting," August 20, 1976 700 

HASKINS & SELLS 

Response to April 8, 1976 letter from Thomas B. Hogan, partner, Haskins - 
& Sells, April 30, 1976 701 

Excerpt from the report of the trustee of Equity Funding Corporation of 

America, October 31, 1974 704 

Article in Wall Street Journal regarding fraud at Equity Funding Corpora- 
tion of America, June 5, 1975 726 

Regulatory reform discussion outline presented by John F. Utley of 
Haskins & Sells, chairman, Committee on Regulated Industries, AICPA 
White House Conference, July 2, 1975 727 

PEAT, MARWICK, MITCHELL & CO. 

Response to April 8, 1976 letter from Walter E. Hanson, senior partner, 

Peat, Marwick, Mitchsll & Co., May 4, 1976 730 

Statement of Hugh C. Braly of Peat, Marwick, Mitchell & Co., on behalf 
of Rocky Mountain Oil & Gas Association, before Ways & Means 
Committee, July 22, 1975 732 

SEC accounting series release No. 173 in the matter of Peat, Marwick, 

Mitchell & Co., July 2, 1975 736 

Letter from Arthur Young & Co. to the partners of Peat, Marwick, 

Mitchell & Co., November 21, 1975 788 



XV 

PBICE WATEBHOUSE & CO. 

Response to April 8, 1976 letter from John C. Biegler, Price Waterhouse & Page 
Co., April 30, 1976 789 

Statement by Roscoe L. Egger, Jr. of Price Waterhouse & Co. on behalf of 
Chamber of Commerce of the United States, before the Senate Govern- 
ment Operations Committee, regarding regulatory reform bills, May 24, 
1976 796 

Article in Wall Street Journal, regarding Price Waterhouse & Co. knowl- 
edge of bribe paid by United Brands, April 11, 1975 809 

Article in Wall Street Journal, about SEC charges regarding bribes paid by 

General Tire, May 11, 1976 810 

TOUCHE ROSS & CO. 

Response to April 8, 1976 letter from Russell E. Palmer, managing partner, 

Touche Ross & Co., April 30, 1976 812 

Findings, opinion and order accepting waiver and consent and imposing 
remedial sanctions before the Securities and Exchange Commission in 
the matter of Touche Ross & Co., February 25, 1974 820 

SEC order for public proceedings in the matter of Touche Ross & Co. 

et al., Giant Stores Corp. and Ampex, October 1, 1976 834 

APPENDIX D— COMPENSATION OF PRINCIPAL EXECU- 
TIVES AND NUMBER OF WOMEN AND BLACK PARTNERS 
IN "BIG EIGHT" FIRMS 

Letter from Senator Metcalf to managing partners of "Big Eight" account- 
ing firms regarding compensation received by their three most highly 
paid executives and the number of women and blacks who are partners 
in the firms, June 7, 1976 845 

ARTHUR ANDERSEN & CO. 

Response to June 7, 1976 letter from G. E. Stanton, vice chairman- 
administration, Arthur Andersen & Co., July 16, 1976 847 

ARTHUR YOUNG & CO. 

Response to June 7, 1976 letter from William S. Kanaga, managing 
partner, Arthur Young & Co., June 30, 1976 852 

COOPERS & LYBBAND 

Response to June 7, 1976 letter from Philip L. Defliese, managing partner, 

Coopers & Lybrand, July 20, 1976 853 

ERNST <fc ERNST 

Response to June 7, 1976 letter from R. T. Baker, managing partner, 
Ernst & Ernst, June 24, 1976 859 

Letter from Senator Metcalf to Mr. Baker, managing partner, Ernst & 

Ernst, June 28, 1976 860 

Response to June 28, 1976 letter from R. T. Baker, managing partner, 

Ernst & Ernst, September 1, 1976 862 

HASKINS & SELLS 

Response to June 7, 1976 letter from Michael X. Chetkovich, managing 

partner, Haskins & Sells, July 15, 1976 S63 

PEAT, MARWICK, MITCHELL & CO. 

Response to June 7, 1976 letter from Victor M. Earle III. general counsel. 

Peat, Marwick, Mitchell & Co., June 25, 1976 866 



XVI 



PRICE WATEEHOUSE & CO. 



Response to June 7, 1976 letter from John C. Biegler, Price Waterhouse ^^e 
& Co., June 10, 1976 870 

TOUCHE ROSS & CO. 

Response to June 7, 1976 letter from Russell E. Palmer, managing partner, 

Touche Ross & Co., June 11, 1976 871 

APPENDIX E— THE AMERICAN INSTITUTE OF CERTIFIED 

PUBLIC ACCOUNTANTS 

Letter from Senator Metcalf to Wallace E. Olson, president, AICPA, 

requesting certain information regarding AICPA activities, May 7, 1976_ 873 
Response from Mr. Olson, June 7, 1976 876 

AICPA financial statement, excerpted from 1975 AICPA annual report 926 

Index of presentations by AICPA from January 1975 through March 1976- 935 

Objectives of Federal Taxation Executive Committee and subcommittees 
as described in AICPA Committee Handbook 943 

Objectives of other important AICPA committees as described in AICPA 

Committee Handbook 946 

Letter from John Lawler, administrative vice president, AICPA, to 

members of AICPA council, April 12, 1972 948 

"The Political Action Committee: A Guide for Professional Accountancy," 

a brochure distributed by the AICPA 951 

Article in CPA Journal, regarding congressional regulation of accounting 
principles, by Jerry J. Throckmorton, Wright State University, and 
Russell H. Hereth, University of Cincinnati, April 1976 961 

Article in CPA Journal, regarding national political program for the 
accounting profession, by Gilbert Simonetti, Jr., vice president, AICPA, 
February 1976 964 

Article in CPA Journal, regarding future accounting actions and prospects, 

by Louis M. Kessler, past president of AICPA, March 1976 968 

Letter from Gilbert Simonetti, Jr., vice president, AICPA, regarding Moss 
amendment to establish an Office of Petroleum Accounting and Auditing, 
to Representative H. John Heinz III, July 9, 1975 971 

Letter from William T. Barnes, chairman, AICPA Federal Government 
Division, regarding premerger notification legislation, to Senator Philip 
A. Hart, July 15, 1975 973 

Letter from Philip L. Defliese, AICPA board chairman, regarding legisla- 
tion to audit energy information, to Representative John E. Moss, 
September 4, 1975 976 

Statement by Federal Tax Division of AICPA, on estate and gift tax 
reform, submitted to House Ways and Means Committee, March 15, 
1976 981 

Statement by Federal Tax Division of AICPA, on tax revision, submitted 

to Senate Finance Committee, March 18, 1976 985 

Letter from Ivan Bull, AICPA board chairman, regarding possible Govern- 
ment intervention in accounting matters, to AICPA council members in 
Southeastern States, July 23, 1976 993 

Objectives of AICPA, excerpted from AICPA publication, Professional 

Standards — Ethics and Bylaws, September 1, 1974 996 

AICPA's plan for voluntary quality control review program for CPA firms 

with SEC practices or with general audit practices, July 23, 1976 1000 

AICPA's proposed statement on auditing standards — "The Independent 
Auditor's Responsibility for the Detection of Errors or Irregularities," 
April 30, 1976 1009 

AICPA's proposed statement on auditing standards — "Illegal Acts bv 

Clients," April 30, 1976 1015 

Statement by Manuel F. Cohen, chairman, Commission on Auditor's 
Responsibilities, defining the role and responsibilities of independent 
auditors, to the AICPA council, May 1976 1020 

Financial appeal by Michael N. Chetkovich, chairman, board of trustees, 
Accounting Research Association, to accounting firms and individual 
practitioners represented in AICPA 1035 

Brochure published by Accounting Research Association of AICPA 

inviting financial support 1037 



XVII 

Description of nature of management advisory services by accounting 

firms, issued by Management Advisory Services Executive Committee, Page 
AICPA 1 1041 

Article by Morton Mintz, Washington Post, regarding solicitation of 
"Big Eight" accounting firms for contributions to President Nixon's 
reelection campaign, November 2, 1973 1050 

Article by Frederick Andrews, Wall Street Journal, regarding clearance 
by AICPA Trial Board of Maurice H. Stans, January 19, 1976 1053 

Article by Richard Phalon, New York Times, regarding clearance by 

AICPA Trial Board of Maurice H. Stans, January 20, 1976 1054 

Speech by Wallace E. Olson, AICPA president, regarding the search for 
fairness in financial reporting, before the Los Angeles chapter of the 
California Society of CPAs, March 23, 1976 1055 

Representation of "Big Eight" accounting firms on AICPA committees, 
compiled by subcommittee staff 1078 

APPENDIX F— THE NATIONAL ASSOCIATION OF STATE 
BOARDS OF ACCOUNTANCY 

Letter from Senator Metcalf to NASBA., requesting certain information 

regarding NASBA activities, March 30, 1976 1109 

Response from W. Douglas Sprague, president, NASBA, April 6, 1976__ 1111 

Annual report, NASBA, 1974-75 1117 

Letter from Senator Metcalf to Mr. Sprague, NASBA president, re- 
questing elaboration of certain provisions of NASBA's response, April 13, 

1976 - 1141 

Response from Mr. Sprague, April 28, 1976 1143 

Staff compilation of contributions by major accounting firms to NASBA__ 1148 

APPENDIX G— OTHER FINANCIAL ACCOUNTING STANDARDS 

BOARD SPONSORS 

FINANCIAL EXECUTIVES INSTITUTE 

Letter from Senator Metcalf to C. C. Hornbostel, president, Financial 
Executives Institute, requesting certain information regarding FEI 
activities, April 1, 1976 1149 

Response from Mr. Hornbostel, May 19, 1976 1151 

Financial Executives Institute National Headquarters financial statements 

for year ending June 30, 1975 1154 

"Financial Executives Institute, the Voice of Corporate Financial Officers," 
a brochure published by Financial Executives Institute 1156 

Letter from William M. Home, Jr., chairman, Financial Executives 
Institute Committee on Taxation, to Senator Metcalf, with enclosed 
summary and conclusions of study by Prof. Robert B. Stobaugh, 
Harvard Business School, regarding domestic effect of proposal to tax 
unremitted foreign earnings of U.S. -controlled multinationals, June 8, 
1976 1167 

Letter from Mr. Hornbostel to Senator Ribicoff in opposition to Haskell 
amendment to establish Office of Energy Information and Analysis, 
July 14, 1976 1171 

NATIONAL ASSOCIATION OF ACCOUNTANTS 

Letter from Senator Metcalf to William M. Young, Jr., executive director, 
National Association of Accountants requesting certain information re- 
garding NAA activities, April 2, 1976 1173 

Response from Mr. Young, April 22, 1976 1175 

Financial statement and executive director's report for fiscal 1975, National 

Association of Accountants 11 78 

Letter from Senator Metcalf to Mr. Young, requesting elaboration of 

certain portions of response, April 29, 1976 1184 

Response from Mr. Young, May 12, 1976 1186 



67-159 O - 77 - 2 



XVIII 

Letter from Dudley E. Browne, National Association of Accountants Sub- ^age 
committee on Responses to Cost Accounting Standards Board, regarding 
issues relating to cost of capital, to CASB Project Director Paul R. Mc- 
Clenon, June 30, 1975 1190 

Letter from Allan C. Crane, chairman, National Association of Accountants 
Management Accounting Practices Committee, regarding depreciation of 
tangible capital assets, to Staff Director Joseph J. Jasinski, House Bank- 
ing Subcommittee on Economic Stabilization, July 16, 1975 1195 

Letter from Mr. Browne to Arthur Schoenhaut, CASB executive secretary, 
regarding proposed cost standard dealing with cost of money as an 
element of the cost of capital, April 23, 1976 1197 

AMERICAN ACCOUNTING ASSOCIATION 

Letter from Senator Metcalf to Paul Gerhardt, administrative secretary, 
American Accounting Association, requesting certain information re- 
garding AAA activities, April 2, 1976 1199 

Response from Mr. Gerhardt, April 29, 1976 1202 

Financial statement, American Accounting Association, 1974 and 1975 1204 

FINANCIAL ANALYSTS FEDERATION 

Letter from Senator Metcalf to T. R. Lilley, president, Financial Analysts 
Federation, requesting certain information regarding its activities, 

April 2, 1976 1206 

Response from Mildred M. Hermann, corporate secretary, Financial 

Analysts Federation, April 28, 1976 1208 

Statement by Financial Analysts Federation regarding its activities 1210 

Schedule of income and expenses of Financial Analysts Federation, fiscal 

1975, and fiscal 1976 budget 1212 

Article in Financial Analysts Federation Newsletter, regarding work in 

progress, November 1973 1213 

Article in Financial Analysts Journal, regarding Financial Accounting 
Standards Board hearing on accounting for research and development, 

May-June 1974 1213 

Article in Financial Analysts Journal, regarding Financial Analysts Federa- 
tion participation in FASB proceedings, July- August 1974 1214 

Article in Financial Analysts Journal, regarding segment reporting, 

September-October 1974 1215 

Article in Financial Analysts Journal, regarding Financial Analysts 

Federation submissions to SEC and FASB, November-December 1974__ 1216 
Article in Financial Analysts Journal, regarding views on leasing, interim 
reporting, contingencies and debt reclassification, January-Februar} 7- 

1975 1216 

Article in Financial Analysts Journal, regarding comments to FASB on 
accounting for leasing, contingencies and certain marketable securities 
and restructuring of debt in a troubled loan situation, January-February 

1976 1217 

Article in Financial Analysts Journal, regarding Financial Analysts Federa- 
tion comments on replacement cost disclosure, segment reporting, 
materiality and pension plan reporting, March- April 1976 1218 

APPENDIX H— FINANCIAL ACCOUNTING STANDARDS 

BOARD 

Letter from Senator Metcalf to Marshall S. Armstrong, chairman of 
FASB, requesting certain information regarding FASB activities, May 

5, 1976 1219 

Response from Mr. Armstrong, May 27, 1976 1222 

Abbreviations used by FASB 1223 

Description of the FASB 1224 

FASB EXHIBITS 

Annual compensation of members of The Financial Accounting Standards 

Board 1228 

Fringe benefits provided for members of the Financial Accounting Standards 

Board 1229 



XIX 

Summary of contributions received by Financial Accounting Foundation *P a £ e 
for the years ended December 31, 1975 and 1974 1232 

Contributions received from the public accounting profession for the years 

ended December 31, 1975 and 1974 1233 

Contributions received from industry and commerce for the years ended 

December 31, 1975 and 1974 1237 

Contributions received from other sources for the years ended December 
31, 1975 and 1974 1262 

Memberships held by trustees of the Financial Accounting Foundation and 
members of the Financial Accounting Standards Board and Financial 
Accounting Standards Advisory Council in the foundation's sponsoring 
organizations 1263 

Explanation of the restrictions on outside financial interests mandated in 
section 4, article II-A of the bylaws of the Financial Accounting Foun- 
dation 1266 

Policies in respect of investments, personal activities, speeches and publi- 
cations of members and directors of the Financial Accounting Standards 
Board; [and, Questionnaire Relating to Investments and Personal Ac- 
tivities] (Staff Note: Questionnaire retained in committee files) 1275 

Policies in respect of personal activities, speeches and publications of mem- 
bers of the staff of the Financial Accounting Standards Board [and 
affirmation form} (Staff Note: Affirmation form retained in committee 
files) 1287 

Explanation of any restrictions on financial interests or positions held by 
trustees of the Financial Accounting Foundation, corporate electors of 
the foundation, or members of the Financial Accounting Standards 
Advisory Council 1292 

Professional staff 1298 

Consultants engaged from January 1, 1973 (date of inception) to May 15, 

1976 1301 

Persons who have served on FASB task forces from January 1, 1973 (date 

of inception) to May 15, 1976 1303 

Members of the FASB screening committee on emerging problems 1312 

General statement regarding the Financial Accounting Standards Board's 
communications with Congress, the SEC, CASB, and other Federal 
agencies or departments 1313 

Testimony before the Committee on Interior and Insular Affairs, U.S. 

Senate, March 9, 1976, re S. 1864, Energy Information Act 1317 

Letter dated July 11, 1975, to Hon. Harley O. Staggers, chairman, Inter- 
state and Foreign Commerce Committee of the U.S. House of Repre- 
sentatives, re H.R. 7014, Energy Conservation and Oil Policy Act cf 
1975 1330 

Letter dated October 3, 1975, to Hon. Harley O. Staggers, chairman, con- 
ference committee on S. 622, Energy Conservation and Oil Policy Act 
of 1975 1334 

Letter dated October 9, 1975, from the Financial Accounting Foundation 

to members of the conference committee on S. 622 1341 

(Staff note: Examples of FASB correspondence with various agencies 
are retained in the committee files.) 

General statement regarding the Financial Accounting Standards Board's 
meetings with prominent public accountants, businessmen, and members 
of the academic community 1347 

Meetings held with prominent public accountants, businessmen, and 
members of the academic community 1350 

Meetings scheduled to be held as of May 15, 1976, with prominent public 

accountants, businessmen, and members of the academic community 1358 

Organizational charts of the Financial Accounting Foundation and the 

Financial Accounting Standards Board 1360 

Financial statements excerpted from the 1975 annual report of the Finan- 
cial Accounting Foundation and Financial Accounting Standards Board _ 1363 
(Staff note: 1973, 1974, and 1975 reports are retained in committee 
files.) 

Certificate of incorporation and bylaws of the Financial Accounting 

Foundation 1 367 

(Staff note: Rules of FASB procedure retained in committee files.) 
Members of the Financial Accounting Standards Advisory Council (This is 

the end of the exhibits submitted by FASB) 1395 



XX 

Article in Wall Street Journal regarding FASB decision to consider oil and "Page 
gas accounting, October 6, 1975 1397 

Address by Marshall S. Armstrong, FASB chairman, regarding the politics 
of establishing accounting standards, before third annual Securities Reg- 
ulation Institute, San Diego, January 16, 1976 1398 

Article in Wall Street Journal regarding return of FASB member Walter 

Schuetze to Peat, Marwick, Mitchell & Co., April 16, 1976 1419 

Article in FASB Status Report regarding return of Mr. Schuetze to Peat, 
Marwick, Mitchell & Co., and reappointment of FASB member Donald J. 
Kirk, April 28, 1976 1420 

Letter from Robert Van Riper, FASB administrator of public information, 
regarding FASB meeting with the Business Roundtable, to Vic Reinemer, 
staff director, Senate Subcommittee on Reports, Accounting, and Man- 
agement, October 11, 1976 1421 

Staff study of private interests represented on FASB task forces 1423 

APPENDIX I— SECURITIES AND EXCHANGE COMMISSION 

SEC request for partial response and solicitation of comments on certain 
questions regarding Arthur Andersen & Co., file No. S7-647, July 27, 
1976 1429 

SEC Rule 210.2-01 regarding qualifications of accountants 1431 

SEC accounting series release No. 4 regarding administrative policy on 

financial statements, April 25, 1938 1432 

SEC accounting series release No. 150, a statement of policy on the estab- 
lishment and improvement of accounting principles and standards, 
December 20, 1973 1433 

Letter from SEC Chairman Ray Garrett, Jr., regarding Moss amendment 
(to H.R. 7014) to authorize Comptroller General to audit energy informa- 
tion and certain financial statements, to Frank G. Zarb, Administrator, 
Federal Energy Administration, August 22, 1975 1435 

Letter from SEC Senior Commissioner Philip A. Loomis, Jr., regard- 
ing accounting and auditing aspects of H.R. 7014, to Representative 
Clarence J. Brown, October 3, 1975 1437 

Letter from Senator Metcalf, regarding proposed SEC rule on replacement 

cost data, to George A. Fitzsimmons, Secretary, SEC, January 29, 1976__ 1440 

Article in the Wall Street Journal, regarding SEC withdrawal of proposal 

regarding quarterly auditing, February 11, 1976 1444 

Article in The CPA Letter, regarding SEC appointment of advisory com- 
mittee on replacement cost data implementation, May 24, 1976 1445 

Letter from John C. Burton, Chief Accountant, SEC, regarding accounting 
series releases, to John B. Chesson, Counsel, Senate Subcommittee on 
Reports, Accounting, and Management, January 28, 1976 .1446 

Letter from Senator Metcalf, regarding SEC accounting responsibilities 

and authority, to SEC Chairman Roderick Hills, March 1, 1976 1450 

Response from Mr. Hills, April 30, 1976 1451 

Rule 2(e) of the SEC's Rules of Practice, regarding appearance and 

practice before the Commission 1465 

Letter from Senator Metcalf, regarding rule 2(e) proceedings on unpro- 
fessional behavior, to SEC Chairman Hills, April 26, 1976 1467 

Response from Mr. Hills and accompanying memorandum from Harvey 

L. Pitt, SEC General Counsel, June 10, 1976 1469 

Letter from Senator Metcalf, requesting analysis of the Hochfelder decision 
of the Supreme Court concerning negligence and liability of accountants, 
to SEC Chairman Hills, May 19, 1976 1479 

Response from Mr. Hills and accompanying memoranda from Harvey L. 

Pitt, SEC General Counsel, August 27, 1976 1482 

Opinion X)f the U.S. Supreme Court, Ernst & Ernst v. Hochfelder, et al 1509 

Letter from John C. Burton, Chief Accountant, SEC, regarding accounting 
incerest organizations with whom SEC representatives meet, to John 
B. Chesson, Counsel, Senate Subcommittee on Reports, Accounting, and 
Management, August 9, 1976 1545 

Transcript of proceedings, Arthur Andersen & Co. v. SEC, in the U.S. 
District Court, Northern District of Illinois, Eastern Division, No. 
76 C 2832, September 3, 1976 1547 



XXI 

APPENDIX J— COST ACCOUNTING STANDARDS BOARD, 
GENERAL ACCOUNTING OFFICE AND INTERNAL REVE- 
NUE SERVICE 

Letter from Senator Metcalf to Elmer B. Staats, Chairman, Cost Ac- "Page 
counting Standards Board, March 1, 1976 1563 

Response from Mr. Staats, March 15, 1976 1564 

Letter to Jack Chesson, subcommittee counsel, from Arthur Schoenhaut, 
executive secretary, CASB, with enclosed list of members of committees 
of professional : < counting associations aid business g'r 1 r; which ra^e 
assisted the CA~B, June 22, 1976 1566 

Letter from 3ASB Ch irma i Elmer . St- vs re- ar ing the C .SB Pabl . j 
service award, to AIC PA ^'hairman Ivan ull, ipril 13, i9"o ._ 1530 

Letter from Senator . tcalf, regarding pr< posed ( AS1> rule on historical 
depreciation costs for inflation, December 5, 1975 1581 

Letter from Senator Metcalf to Elmer Staats, Comptroller General, 

General Accounting Office, March 1, 1976 1586 

Response from Mr. Staats, March 31, 1976 1587 

Letter from Senator Metcalf to Donald Alexander, Commissioner, Internal 

Revenue Service, March 1, 1976 1588 

Response from Mr. Alexander, April 22, 1976, and enclosed IRS publica- 
tion 538, "Tax Information on Accounting Periods and Methods" 1589 

APPENDIX K— MISCELLANEOUS 

Letter from Abraham J. BrilofT, professor of accountancy, Baruch College, 
City University of New York, regarding Lockheed Aircraft Corp. a'ld 
Arthur Young & Co., to Senator Metcalf, July 6, 1976 1605 

Statement by Professor Briloff to House Commerce Subcommittee on 

Oversight and Investigation, May 21, 1976 1609 

Excerpt from Professor Briloff' s book, "More Debits Than Credits," re- 
garding Lockheed Aircraft Corp. and accounting matters 1662 

Interview with Professor Briloff by editors of Barron's, April 12, 19, and 26, 

1976 issues of Barron's 1681 

Letter from Professor Briloff, regarding new system of depreciation re- 
cently adopted by Department of Commerce, with attached excerpt from 
"More Debits Than Credits," to Representative Charles A. Vanik, 
March 24, 1976 1697 

Testimony by Adm. Hyman G. Rickover, Deputy Commander for Nuclear 
Propulsion, Naval Sea Systems Command, and Director, Division of 
Naval Reactors, Energy Research and Development Administration, 
regarding cost accounting standards, before House Defense Appro- 
priations Subcommittee, May 15, 1974 1711 

Testimony by Admiral Rickover, regarding accounting matters, before 

House Armed Services Seapow r er Subcommittee, September 23, 1974 1721 

Testimony by Admiral Rickover, regarding Renegotiation Board, before 
House Banking Subcommittee on General Oversight and Renegotiation, 
June 12, 1975 1726 

Letter from Norman J. Elliott, CPA, regarding experience with "Big 

Eight" firms, September 1, 1976 1729 

Letter from Kenneth Leventhal, Kenneth Leventhal & Co., alleging anti- 
competitive behavior by "Big Eight" firms, March 31, 1976 1731 

Letter from Senator Metcalf to Mr. Leventhal, June 4, 1976 1732 

Letter from Robert Coffman, chairman, AICPA Committee on Displace- 
ment of CPA Firms, to Norman H. Stavisky, CPA, Stavisky & Shapiro, 
September 17, 1974 1733 

Memorandum from Mr. Stavisky, July 14, 1976 1735 

Letter from Robert Half, Robert Half Personnel Agencies, Inc., regarding 
personnel placement activities of large public accounting firms, 
September 20, 1976 1736 

Article by Charles G. Carpenter and Robert H. Strawser in the Journal of 
Accountancy regarding displacement of auditors when clients go public, 
June 1971 1743 

Article by Eli Mason, CPA, Mason & Co., in the CPA Journal, proposing 

restructuring of accounting profession, July 1975 1747 

Article in Time, regarding corporate corruption, February 23, 1976 1754 

News release by Representative William J. Hughes and related study re- 
garding creative accounting practices and profits of oil companies, 
April 9 1976 1755 



SUMMABY 

The accounting establishment in the United States is primarily 
comprised of the Nation's eight largest accounting firms, certain influ- 
ential CPA professional organizations and business lobbying groups, 
and a few Federal agencies — most notably the Securities and Ex- 
change Commission. This study examines the inter-relationships and 
activities of those private groups and Federal agencies in order to 
determine their impact on accounting practices promulgated or 
approved by the Federal Government. 

The purpose of this study is to inform Congress and the public 
regarding the participants involved in developing and applying ac- 
counting practices which significantly affect government policy, the 
economy and society in general. Concise factual information regard- 
ing the accounting establishment has not previously been readily 
available to Congress and the public. This study and its appendices 
provide information necessary to formulate sound Federal policy on 
accounting matters. 

Accounting standards govern the presentation of information in 
corporate financial statements. Enactment of the Securities Act of 
1933 and the Securities Exchange Act of 1934 created a need for 
accountants to act as independent auditors for publicly-owned corpo- 
rations by requiring that certain information reported to the public 
by corporations be independently certified. The "Big Eight" and 
other large accounting firms have prospered from this Federal re- 
quirement because they are retained as the auditors for the Nation's 
major corporations. Such auditors are responsible for providing inde- 
pendent certification that corporate financial statements present fairly 
and accurately the results of business activities. 

Independent auditors must have the complete confidence of the 
public for whose benefit the Federal securities laws were enacted. 
That confidence can only be maintained by strict adherence to stand- 
ards of conduct which assure the public that auditors are truly inde- 
pendent and competent to perform their responsibilities. Even the 
appearance of bias or conflict of interest by an independent auditor 
can erode the public confidence necessary to make the disclosure policy 
embodied in the Federal securities laws successful. 

The primary purpose of the Federal securities laws is to instill 
public confidence in the reliability and accuracy of information re- 
ported by publicly-owned corporations. Doubts as to the reliability 
and accuracy of such information impair its usefulness to the public 
for making efficient economic and social decisions, and defeat the pur- 
pose of the securities laws. Independent auditors perform a key func- 
tion in achieving the <roal f ^] le Federal securities laws because they 
provide the means for independently checking and confirming the 
information reported by corporations. 

(1) 



Historically, Congress and the public have regarded accounting as 
an arcane subject better left to accountants themselves. Continual 
revelations of wrongdoing by publicly-owned corporations have caused 
a new awareness of the importance of accounting practices in permit- 
ting such abuses to occur. Unexpected failures of major corporations 
have led to requests for substantial assistance to such companies from 
taxpayers. Accounting practices ultimately involve social issues that 
affect the Nation's economic welfare. 

Because of their broad social and economic significance, accounting 
issues must be addressed by Congress and the public in a manner 
which ensures that the public interest is protected. If past abuses are 
to be prevented in the future, it is important that the accounting 
establishment, which has permitted many abuses to occur, be under- 
stood. Accounting issues are too important to be left to accountants 
alone. 



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Chart 1 on page 3 provides a basic outline of the relationship 
among major organizations described in this study. The various boxes 
in Chart 1 identify the primary segments of the accounting establish- 
ment and their roles in the extraordinary process by which public 
authority to set accounting standards has been delegated to self- 
interested private parties. Chart 1 is a useful guide for summarizing 
the information contained in this study. 

THE "BIG EIGHT" ACCOUNTING FIRMS 

Chart 1 shows that the first major segment comprising the account- 
ing establishment is the "Big Eight" accounting firms which are 
described in Chapter I. These eight firms are so big and influential in 
relation to other accounting firms that they dominate the practice of 
accounting in the United States and probably throughout the world. 
Listed alphabetically, the "Big Eight" firms are : 

Arthur Andersen & Co., 

Arthur Young & Co., 

Coopers & Lybrand, 

Ernst & Ernst, 

Haskins & Sells, 

Peat, Marwick, Mitchell & Co., 

Price Waterhouse & Co., and 

Touche Ross & Co. 
The "Big Eight" firms provide auditing and accounting services 
for the vast majority of major corporations. The next seven largest 
accounting firms in the Nation are important, but do not match the 
"Big Eight" in terms of size and influence. 

The "Big Eiffht" are often called "public accounting firms" or 
"independent public accounting firms." This study finds little evi- 
dence that they serve the public or that they are independent in fact 
from the interests of their corporate clients. For that reason, this 
study refers to the "Big Eight" simply as accounting firms. 

Information on the "Big Eight" firms and other private segments 
of the accounting establishment is not readily available to Congress 
and the public from published sources. Therefore, it was necessary for 
this subcommittee to request information directly from the "Big Eight" 
and other private groups. Additional information was obtained from 
Federal agencies and other sources within and without the accounting 
profession. 

The "Big Eight" firms are large organizations. Each has several 
hundred partners, and their supporting staffs range in size from ap- 
proximately 4,000 to over 8,000 persons. They maintain offices in every 
major city in the United States, and have affiliations in major cities 
overseas. 

The influence exercised by the "Big Eight" firms far exceeds that 
which might be expected from the number of CPAs working for them. 
Only about 11 or 12 percent of the Nation's estimated 160,000 CPAs 
are associated with "Big Eight" firms, but their influence is magnified 
because their clients are the largest and wealthiest corporations in the 
United States. Because of their large size, the "Big Eight" firms 
exercise substantial influence directly on accounting practices promul- 



gated or approved by the Federal Government. They also exercise sub- 
stantial indirect influence through the American Institute of Certified 
Public Accountants (AICPA), which they control, and through the 
accounting practices followed by their corporate clients. 

On the average, the "Big Eight'' firms receive approximately 70 
percent of their total revenues from performing auditing and account- 
ing services, 18 percent from performance of tax services, and the 
remainder from performing management advisory services. Auditing 
~and accounting services involve designing a reliable system of record- 
keeping for businesses, checking the record-keeping system periodically 
to assure that it is effective, providing assistance in presenting finan- 
cial information so that it accurately conveys the results of business 
activities, and certifying financial statements for accuracy. Tax serv- 
ices involve helping clients achieve maximum financial benefits from 
provisions of Federal, State, local, and foreign tax laws. 

Performance of management advisory services involves helping a 
client to manage its business, and goes beyond the expertise normally 
associated with the practice of accounting. The "Big Eight" account- 
ing firms provide management consulting services such as executive 
recruitment, marketing analysis, plant layout, product analysis, 
actuarial services, and financial management services. All eight firms 
employ professionals, termed "principals," (who are not CPAs) to 
provide expertise in performing non-accounting management advisory 
services. 

The supply of auditing and accounting services to corporations listed 
on either the New York Stock Exchange or the American Stock 
Exchange is heavily concentrated among the "Big Eight" firms. A 
study performed by the Congressional Research Service for this sub- 
committee found that 85 percent of the 2,641 corporations listed on the 
New York Stock Exchange and the American Stock Exchange are 
clients of "Big Eight" firms. Those clients accounted for one-half of 
the $2,552 billion in sales for the Nation's manufacturing, trade, and 
retail sectors and about 84 percent of the $75.4 billion of corporate 
profits after taxes, using average annual data for the years 1974 and 

Concentration of major corporate clients among the "Big Eight" 
firms is greatest on the New York Stock Exchange Avhere the largest 
corporations are listed. "Big Eight" accounting firms have 92 percent 
of the companies listed on that exchange as clients. For all the corpo- 
rations listed on the New York Stock Exchange, the clients of "Big 
Eight" firms accounted for 94 percent of all sales (revenues) received, 
94 percent of all profits earned, 90 percent of all income taxes paid, 
94 percent of all people employed, and 94 percent of all assets owned. 

A single "Big Eight" firm — Price Waterhouse & Co.— provides 
auditing and accounting services for clients that account for 24 per- 
cent of the sales and 28 percent of the earnings on the New York 
Stock Exchange. Four other firms — Arthur Andersen & Co., Coopers 
& Lybrand, Haskins & Sells, and Peat, Marwiek, Mitchell & Co.— col- 
lectively are the auditors for 50 percent of the sales and 51 percent of 
the earnings for all of the corporations on that exchange. Thus, five 
of the "Big Eight" accounting firms collectively audit 74 percent of 
the total sales and 79 percent of the total net earnings of corporations 
listed on the New York Stock Exchange. 



On the American Stock Exchange, 76 percent of the corporations 
listed are audit clients of "Big Eight" firms. For all the corporations 
listed on the American Stock Exchange, those clients account for 67 
percent of all sales (revenues) received, 67 percent of all profits 
earned, 66 percent of all income taxes paid, 61 percent of all people 
employed, and 73 percent of all assets owned. 

Again, the clients of Price Waterhouse & Co. account for the most 
revenue and income, about 16 percent of the total sales and 19 per- 
cent of the total net income of corporations listed on the American 
Stock Exchange. When the clients of Price Waterhouse & Co. are 
grouped with those of Arthur Andersen & Co., Coopers & Lybrand, 
Haskins & Sells, and Peat, Marwick, Mitchell & Co., those five firms 
are the auditors for clients that produce 45 percent of the sales and 
49 percent of the earnings for all the corporations listed on the Amer- 
ican Stock Exchange. 

The Congressional Research Service found that the concentration 
of corporate clients among those five "Big Eight" firms was even 
greater when only the Nation's 50 largest corporations are considered. 
Analysis of the auditors for the 10 largest companies in six selected 
industries also showed concentration among certain "Big Eight" ac- 
counting firms. For example, Price Waterhouse & Co. clients include 
six of the 10 largest oil companies — Exxon, Gulf, Standard Oil of 
California, Standard Oil of Indiana, Royal Dutch Petroleum and 
Shell. 

As independent auditors for major corporations, the "Big Eight" 
firms exercise great influence over the financial results shown by those 
corporations. The accounting establishment has permitted the evolu- 
tion of a system of flexible, alternative accounting methods to report 
similar business transactions. Drastically different financial results 
can be reported to the public merely by using alternative accounting 
methods selected from the collection of acceptable methods. 

Independent auditors must agree with the accounting methods used 
by a corporation in order to certify to the public that the corpora- 
tion's financial statements present fairly the results of its operations. 
The present system of flexible, alternative accounting standards allows 
an independent auditor to use a great deal of discretion in approving 
various accounting methods. The method approved by the independent 
auditor can mean the difference between a corporation reporting 
healthy profits or severe losses to investors and the public. 

The independent auditor is also responsible for certifying the ac- 
curacy of corporate records to the public. Present auditing standards 
permit an independent auditor to use a great amount of discretion in 
determining how much testing of corporate records should be done. In 
order to maintain the confidence of investors, government authorities 
and the public, corporations must receive unqualified endorsement 
from their independent auditors regarding the integrity of business 
records. 

Because independent auditors presently exercise significant dis- 
cretionary influence and are intimately involved in the presentation 
of corporate financial statements, the adverse effects traditionally 
associated with excessive market concentration are aggravated by the 
dominant position held by the "Big Eight" firms in supplying audit- 



ing and accounting services to major corporations. Excessive market 
concentration traditionally causes problems concerning the price and 
availability of goods and services. The concentration of major corpo- 
rations as clients of the "Big Eight" indicates a need for an investi- 
gation of possible anti-competitive effects. 

Througn the various services they provide, individual "Big Eight" 
firms have become involved in the affairs of more than one client 
competing within the same industry. Excessive concentration in the 
supply of auditing and accounting services exists among all indus- 
tries, and often within the same industry. The AICPA committee 
structure provides the "Big Eight" accounting firms with an op- 
portunity to promote anti-competitive practices by meeting together 
privately and establishing important auditing and accounting policies. 

Concentration in the supply of auditing and accounting services 
appears to be increasing as a result of corporate mergers and the sale 
of corporate securities to the public. Small and medium-sized account- 
ing firms usually lose clients to the "Big Eight" when smaller com- 
panies "go public" or are acquired by major corporations. 

The practice of accounting is very profitable for partners in "Big 
Eight" firms, especially for the top partners who determine the 
policies followed by the firms. Collectively, the "Big Eight" firms 
have estimated total annual revenues of over $2 billion and net earn- 
ings for their partners of more than $500 million. The substantial fi- 
nancial interests at stake indicate that the firms have a strong vested 
interest in avoiding changes in the present system which might reduce 
the value of their services to clients. 

Serious questions have been raised concerning the independence 
and competence of the "Big Eight" accounting firms and other inde- 
pendent auditors. Those questions have arisen because of accounting 
and auditing problems involved in the Penn Central collapse, the 
Equity Funding fraud, improper and illegal activities by Gulf Oil 
Corp. and Northrop Corp., and the many other abuses by corporations 
which have come to public attention in recent years. A common com- 
plaint in such cases has been, "Where was the independent auditor?" 

Doubts as to the accuracy and reliability of information reported by 
corporations have resulted from continual revelations of corporate 
misconduct which was not found or not reported by independent audi- 
tors. Congress and the public have little assurance that corporate fi- 
nancial statements accurately portray the results of business activities 
because of flexible, alternative accounting; standards. Public confidence 
in independent auditors, which is essential to the success of the Federal 
securities laws, has been seriously eroded. 

This study finds that public doubts concerning the oerformance of 
independent auditors of major corporations are well founded. More- 
over, the proWems causing an erosion of confidence in the ^Bio- 
Eight" accounting firms and other independent auditors are inherent 
in their present system of practice, the procedure by which they are 
chosen, and their relationship to standard-setting bodies. Restoration of 
public confidence in the independence and competence of such auditors 
depends upon reforming the manner in which they perform their 
responsibilities. 

The most important requirement of independent auditors is that they 
be regarded by the public as truly independent from the interests of 



8 

their clients. The "Big Eight" firms have seriously impaired their inde- 
pendence by becoming involved in the business affairs of their corpo- 
rate clients, and by advocating their clients' interests on controversial 
issues. It appears that the "Big Eight" firms are more concerned with 
serving the interests of corporate managements who select them and 
authorize their fees than with protecting the interests of the public, 
for whose benefit Congress established the position of independent 
auditor. 

The management advisory services provided by "Big Eight" firms 
are intended to aid corporate managements in operating their busi- 
nesses, and necessarily involve "Big Eight" firms in the business affairs 
of their clients. Such involvement creates a professional and financial 
interest by the independent auditor in a client's affairs which is incon- 
sistent with the auditor's responsibility to remain independent in fact 
and in appearance. 

When a "Big Eight" firm recruits executives for a corporate client, 
shareholders and the public may wonder if the firm is retained as the 
client's independent auditor primarily because of the relationship exist- 
ing between the firm and the influential executives it recruited. Simi- 
larly, the public may reasonably doubt the ability of a "Big Eight" 
firm to act as independent auditor for a corporate client which has also 
retained the firm to provide marketing analysis, financial management 
services, actuarial services, or other management advisory services. In 
such cases, an independent auditor not only becomes involved in the 
business affairs of its clients, but may be placed in the position of 
auditing its own work. 

Representation of clients' interests is another area where the "Big 
Eight" accounting firms have failed to meet their responsibility to 
remain independent. They advocate the partisan interests of their 
corporate clients on controversial issues, both for a fee and as a "public 
service." Partners of "Big Eight" firms join recognized business lob- 
bies and actively represent them before Federal, State, and local 
governments. 

"Big Eight" firms have advocated the interests of corporate clients 
on substantive political issues regarding taxation of corporations. They 
have supported increased investment tax credits, more liberalized de- 
preciation methods, continuation of tax credits rather than deductions 
for taxes paid to foreign governments, and other procedures designed 
to increase the amount of cash held by big corporations. Advocacy of 
controversial positions involving the fair distribution of taxes results 
in a loss of independence because the auditor's interests become asso- 
ciated with the interests of clients or some other special interest group. 

The "Big Eight" accounting firms readily identify with the self- 
interests of corporate managements on many other controversial issues. 
They testify before State regulatory commissions on the amount of 
profits which should be earned by regulated utilities, and in support 
of automatic cost adjustment clauses which circumvent the regulatory 
process. "Big Eight" firms support inclusion of construction work in 
progress in regulated utility rate bases, as well as charging utility 
customers for Federal income taxes that are never paid to the Federal 
Government. 

They testify before Congress in support of higher oil and natural 
gas prices, and for faster write-offs of production costs. "Big Eight" 



9 

firms write to Federal agencies to urge adoption of rules that would 
have the Federal Government pay private contractors for "costs" that 
are not normally accepted costs at all. They oppose more stringent 
Federal regulations on reporting by corporations, and recommend 
that the Federal Government not adopt uniform accounting methods. 

Independent auditors are endowed with a public reputation for 
impartiality and objectivity because of the special role assigned to 
them by Congress in the Federal securities laws. Their statements 
and recommendations are accorded great respect and credibility be- 
cause of the general belief that such statements and recommendations 
are made independently. Thus, it is highly improper for them to use 
their special status as a basis for advocating the self-interests of their 
corporate clients, especially for profit. 

The competence of the "Big Eight" accounting firms as independ- 
ent auditors has also been questioned in recent years. Three of them 
have been officially disciplined by the SEC for auditing failures. Sev- 
eral of the "Big Eight" firms have been involved in le^al actions re- 
sulting in adverse settlements because of alleged auditing failures. 

The "Big Eight" firms provide auditing, accounting, and manage- 
ment advisory services to Federal, State and local governments as well 
as corporations. Through their employment, they are able to influence 
governmental policies and procedures which may affect the business 
activities of their corporate clients. The influence of the "Big Eight" 
firms on governmental policies and procedures can be substantial in 
certain areas, and may represent a conflict of interest with respect to 
services performed for clients in the private sector. 

The total revenues received by the "Big Eight" firms for services to 
the Federal Government amounted to $16,486,000 in 1975. That was 
more than double the $8,037,000 received in 1971. Performance of serv- 
ices for the Federal Government appears to be of increasing impor- 
tance to the "Big Eight" accounting firms. 

THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS 

Chart 1 on page 3 shows that the American Institute of Certified 
Public Accountants (AICPA) is the first major step in the process by 
which the "Big Eight" firms are able to control the establishment of 
accounting standards used by their corporate clients. The AICPA is 
the largest professional association of CPAs and the most important 
private group affecting the practice of accounting. It dominates all 
significant aspects of accounting because the accounting profession is 
largely self-regulated, and Federal and State authorities have recog- 
nized policies and procedures established by the AICPA as repre- 
senting decisions by the accounting profession. Chapters II, III and 
IV of this study describe the AICPA and its activities. 

The AICPA is organized in a manner which permits the parties 
controlling its power structure to maintain their control over the orga- 
nization. The "Big Eight" firms effectively control the power struc- 
ture, and use the AICPA to advance their collective interests. The 
AICPA's power structure is comprised of its council, its board of di- 
rectors, its president and administrative staff, and its important 
committees which establish AICPA policies and procedures. (See 
Chart 2 on page 72.) 



10 

Although CPAs associated with the "Big Eight" account for only 
15 percent of the AICPA's 117,695 members, they comprised 31 per- 
cent of the 252 members on its council in fiscal 1976. The 15 largest 
accounting firms comprised 42 percent of the council membership. 
Through control of the AICPA's power structure, the "Big Eight'' 
firms are able to assure that most council members agree with their 
views. 

The AICPA's board of directors has broad authority to set policies 
and manage its resources. In fiscal 1976, six of the 18 board members, 
including the immediate past chairman of the board and the desig- 
nated next board chairman, represented "Big Eight" firms. Nine of 
the 18 board members were from the 15 largest accounting firms. 

The real work of the AICPA in terms of performing certain tasks 
and accomplishing specific goals is handled almost exclusively by its 
committee structure. The 108 committees listed and described in the 
1975-76 AICPA Committee Handbook cover every topic of interest 
to the accounting profession. While the influence of the "Big Eight" 
firms pervades the AICPA committee structure, their representation 
is concentrated on committees performing work in substantive areas 
that have an extensive impact on the actual practice of accounting, 
and frequently affect governmental policies. "Big Eight" repre- 
sentation exceeded 50 percent on several of the most important com- 
mittees in fiscal 1976. 

The AICPA bylaws provide that the five most important commit- 
tees — called senior technical committees — shall speak for the AICPA 
in their respective areas without consulting either the council or the 
board of directors. Because Federal agencies and State boards of ac- 
countancy charged with regulating accountants have chosen to rely 
upon the AICPA to such a great extent, the pronouncements of senior 
technical committees have become the prescribed standard followed 
by CPAs in several substantive areas. The public and the accounting 
profession are profoundly influenced by the activities of senior tech- 
nical committees, but these autonomous committees have no proce- 
dural guarantees to protect the interests of those not actually 
represented on the committees. 

The "Big Eight" firms dominate all five senior technical commit- 
tees. Through these committees, they are able to determine the 
AICPA's policies and direct its activities on such important matters 
as accounting standards, auditing standards, management advisory 
services, Federal taxation, and professional ethics. The senior tech- 
nical committees theoretically speak for the entire membership of the 
AICPA in those five areas of vital interest to CPAs and the public. 

The Auditing Standards Executive Committee, one of the senior 
technical committees, performs an especially important function. It 
develops the AICPA's positions on proper auditing procedures which 
are issued as Statements on Auditing Standards. The Federal Gov- 
ernment, State governments, and courts of law generally recognize 
those standards as the ones which must be followed by all CPAs. 

Chart 1 on page 3 illustrates the process by which the "Big Eight" 
firms and the AICPA control the establishment of accounting stand- 
ards. Accounting standards are important because they govern the 
manner in which businesses must present financial information to the 
public. 



11 

The process by which the Auditing Standards Executive Commit- 
tee sets auditing standards on behalf of the AICPA is more direct and 
tightly controlled. Auditing standards equal accounting standards in 
importance because they govern the procedures used by accountants 
to check the accuracy and reliability of business records supporting 
financial statements. The legal liability of accountants in cases involv- 
ing fraud or other illegal activities by corporate managements is often 
determined by their compliance with recognized auditing standards. 

In fiscal 1976, eight of the 21 members on the Auditing Standards 
Executive Committee, including the chairman, represented the "Big 
Eight" firms. The combined representation of the Nation's 15 largest 
accounting firms was 14, or two-thirds of the total committee member- 
ship. 

The "Big Eight" accounting firms also dominate the several xVICPA 
committees established to advise the Federal Government, such as the 
Cost Accounting Standards Board Committee, the Federal Govern- 
ment Executive Committee, the Federal Taxation Executive Com- 
mittee, and the SEC Regulations Committee. When the AICPA 
speaks to the Federal Government, it is the voice of the "Big Eight" 
and, to some extent, the next seven largest accounting firms. 

Several other important committees are dominated by the "Big 
Eight" accounting firms. An example is the Planning and Finance 
Committee which determines the compensation of AICPA staff of- 
ficers. The 15 largest accounting ftrnTs also have their own exclusive 
"advisory committee to promote their interests within the AICPA. 

The AICPA is a big organization which spent over $18 million on 
its various activities in fiscal 1975, including $589,000 just to influence 
the Federal Government. Another $187,000 was spent on Federal taxa- 
tion matters. The "Big Eight" firms have used their influence to guide 
the AICPA into a broad range of activities intended to benefit their 
interests. 

In addition to the professional education and ethics enforcement 
activities undertaken by most other professional associations, the 
AICPA engages in activities designed to increase its power over the 
practice of accounting. It controls the establishment of accounting and 
auditing standards. It develops and grades the Uniform CPA Exam- 
ination used to test CPA applicants in every State. The AICPA also 
provides substantial support to the Xational Association of State 
Boards of Accountancy, an organization which purports to represent 
the State boards that regulate CPAs. 

The AICPA is an active political organization. It has established 
a "key man" program to influence Members of Congress. The purpose 
of the program is to combat "government intervention in the profes- 
sion's affairs" occasioned by an "anti-business" attitude in Congress, 
according to the AICPA's chairman of the board. 

Representatives of the AICPA testify before Congress and make 
presentations to Federal agencies and departments. The AICPA lob- 
bies Congress on both accounting and non-accounting matters. One 
of its major projects is to influence Federal taxation policies. 

The AICPA biennially prepares a booklet entitled ''Recommended 
Tax Law Changes" which it distributes to all Members of Congress. 
Four "Statements of Tax Policy" on controversial tax issues have also 
been prepared and distributed. The AICPA's recommendations con- 



67-159 O - 77 - 3 



12 

sistently support more tax benefits for the accounting profession's 
business clients. 

Many AICPA members, especially those in large accounting firms, 
act as independent auditors for publicly-owned corporations, and are 
required to be independent of their clients' interests in fact and ap- 
pearance. However, the AICPA does not hesitate to identify the inter- 
ests of CPAs with those of their business clients. The accounting pro- 
fession's reputation for objectivity and impartiality, as embodied in its 
preeminent professional association, is used by the AICPA to pro- 
mote the partisan interests of the "Big Eight" firm's corporate clients. 

Another major AICPA project is to expand the use of CPA serv- 
ices bv the Federal Government. This understandable effort is accom- 
panied by statements of the benefits to be realized by the Federal 
Government because CPAs possess great expertise and follow strict 
standards. The AICPA also recommends that CPAs be hired under 
cost-plus type contracts rather than fixed-cost contracts, and that the 
Federal Government "indicate the price it has in mind" so that pro- 
spective contractors will know how much to bid. 

While the AICPA promotes the capabilities of CPAs to depart- 
ments and agencies of the Federal Government with money to spend, it 
cautions Federal enforcement authorities that only limited results can 
be expected from audits performed by CPAs. It advocates legislation 
to limit the legal liability of CPAs for performing faulty or incom- 
plete audits. The AICPA sometimes takes contradictory positions to 
promote different purposes before different parties. 

Actions by the SEC, the Cost Accounting Standards Board, the 
Internal Revenue Service, and other Federal agencies and departments 
often affect the "Big Eight" firms or their corporate clients. The 
AICPA exerts special effort to maintain liaison with such agencies 
and departments in order to influence their activities. The views es- 
poused by the AICPA usually reflect those of the "Big Eight" account 
ing firms and their big corporate clients. 

Federal employees serve on certain AICPA committees which are 
specifically assigned to influence Federal policies and personnel. Be- 
cause the AICPA is a lobbying organization that reflects often con- 
troversial views of the "Big Eight" accounting firms, the participa- 
tion of Federal employees on committees that attempt to influence the 
Federal Government is highly questionable. Federal employees affect 
Federal accounting practices through the performance of their official 
duties, and there is no need for them to participate in influencing other 
Federal employees through a professional lobbying organization. 

The AICPA attempts to respond to major problems facing the ac- 
counting profession by proposing "reforms" that are acceptable to 
those controlling the organization. When strong criticism arose con- 
cerning failures in the establishment of accounting standards, the 
AICPA appointed a study commission which issued its report in 
March, 1972. That report recommended creation of the Financial Ac- 
counting Standards Board. Adoption of that recommendation resulted 
in the present inadequate system of establishing accounting standards 
which is described in this study. 

Similarly, the AICPA appointed its Commission on Auditors' Re- 
sponsibilities — the Cohen commission — to respond to criticism of in- 
dependent auditors of major corporations arising from recent disclo- 



13 

sures of unreported corporate wrongdoing. Although the Cohen 
commission was established and is completely funded by the AICPA, 
it has been designated as an "independent" commission in an effort 
to boost its credibility. The AICPA's Cohen commission has not yet 
completed its study, but has given indications that it will support the 
concept of limited auditor responsibility advocated by the AICPA 
and the "Big Eight" accounting firms. 

The AICPA has already adopted a voluntary program intended to 
assure the public regarding the quality of accounting firms practicing 
before the SEC. The primary participants in the program would be 
the "Big Eight" firms which would review each other to evaluate their 
quality control procedures. The program has several major deficiencies 
which make it wholly inadequate as a basis for public confidence in 
the quality of practice by large accounting firms. 

Two proposals have been issued by the AICPA concerning an inde- 
pendent auditor's responsibility to detect and report illegal acts by 
clients. Both proposals are aimed at limiting the responsibility of inde- 
pendent auditors. The tone of the AICPA proposals is typified by a 
remarkable statement in the second one that auditors are not respon- 
sible for reporting illegal acts to the proper government authorities : 
"Deciding whether there is a need to notify outside parties of an illegal 
act is the responsibility of management. In the ordinary case, the 
auditor is under no legal obligation to notify outside parties." 

The AICPA established the Financial Accounting Standards Board 
and plavs a key role in selecting its members and financing its opera- 
tion. AICPA control over the FASB is carefully written into the 
charter and bylaws creating the FASB. Chart 3 on page 137 illustrates 
the manner in which the AICPA controls the FASB. 

Congress and the public should recognize the partisan and political 
nature of the AICPA when evaluating its influence on accounting 
practices promulgated or approved by the Federal Government. Under 
the control of the "Big Eight" accounting firms, the AICPA sets 
auditing standards and maintains control over the setting of ac- 
counting standards which have substantial impact on the public and 
the Federal Government. Many other areas of public policy affecting 
accounting and business are controlled or hea\ r ily influenced by the 
AICPA. 

THE FINANCIAL ACCOUNTING FOUNDATION 

The Financial Accounting Foundation (FAF) is the non-profit 
corporation organized by the AICPA and co-sponsored by four other 
private interest <rrour>s to operate the Financial Accounting Standards 
Board (FASB), which sets accounting standards.* Those groups are 
the Financial Executives Institute, the Xational Association of Ac- 
countants, the American Accounting Association, and the Financial 
Analysts Federation. None of those private interest groups is suited 
to control the setting of accounting standards which affect the Federal 
Government and the public. 

♦The Securities Industry Association was added as the sixth sponsor of the FAST> on Oc- 
tober 1. 107(5. Although added as a sponsoring croup too late to be included in this study, 
the Securities Industry Association reportedly represents the interests of more thin 800 
investment banking firms. Its addition as an FASB sponsor does not significantly affect the 
findings of this study. 



14 

As shown in Chart 1 on page 3 the FAF does not set accounting 
standards directly, but rather serves as an intermediate organization 
theoretically to separate the FASB from its private sponsors. That 
separation is the basis for the FASB's claim that it is "independent." 
Chart 3 on page 137 illustrates in more detail the relationship between 
the FASB organization and its private sponsoring groups. Chapters 
V, VI, VII, and VIII of this study describe the FASB organization, 
its sponsors, and its activities. 

The FAF is comprised of nine trustees who are selected from the 
five sponsoring groups in the manner summarized on Chart 3. The 
AICPA maintains control over the FAF board of trustees because the 
exclusive power to elect and remove them is vested in the AICPA's 
board of directors, whose chairman is automatically designated as one 
of the trustees. The other sponsors only have the authority to nominate 
a single trustee each. 

Eight of the nine FAF trustees are AICPA members. Only one of 
the trustees supposedly representing the other four sponsoring groups 
is not also a member of the AICPA. In addition to the control they 
exercise through the AICPA over the selection of all trustees, the 
"Big Eight" had three representatives serving directly as FAF 
trustees in 1976. 

The board of trustees has two principal responsibilities — to appoint 
members of the FASB and the Financial Accounting Standards Ad- 
visory Council (FASAC), and to arrange for financing of the entire 
FASB organization. That organization is comprised of the FAF, the 
FASB, and the FASAC, 

Exclusive authority to appoint and remove FASB members is 
vested in the FAF board of trustees, who cannot themselves simul- 
taneously serve on the FASB. FASB members can be removed for 
"reasonably evidencing conduct detrimental to the purposes or repute 
of the FASB." Thus, FASB members are not truly independent of the 
trustees once they are appointed to office. The trustees themselves can 
be removed by the AICPA's board of directors for conduct "detri- 
mental to the purposes or repute of the FAF or the FASB," so they 
are not truly independent either. 

Financing for the FASB organization comes almost exclusively 
from its five private sponsoring groups and their members. All of 
the groups have pledged to support the FASB financially, but their 
contributions are not equal. Contributions to the FASB are concen- 
trated among the large accounting firms and major corporations which 
would be most affected by any major reform of accounting standards. 

The accounting profession donates about half of the money con- 
tributed to operate the FASB. In 1975, a total of $4,129,201 was con- 
tributed to operate the FASB, and the accounting profession donated 
$2,059,076. The "Big Eight", the AICPA, and 41 other accounting 
firms donated 99.6 percent of that amount. 

The "Big Eight" firms each contribute $200,000 annually, so they 
accounted for $1.6 million or 78 percent of the $2,059,076 donated by 
the accounting profession in 1975. The next seven largest accounting 
firms contributed a total of $286,500, meaning that the Nation's 15 
largest accounting firms gave a combined total of $1,886,500 or 92 per- 
cent of the contributions received by the FASB from the accounting 



15 

profession. The AICPA, which is controlled by the large accounting 
firms, donated most of the remainder. 

Corporate contributions toward operating the FASB amounted to 
$1,928,349 in 1975, a little less than half of the total $4,129,201 received. 
Approximately 80 percent of the corporate contributions was traceable 
to members of the Financial Executives Institute, a business lobbying 
group, which is one of the FASB's sponsors. Although 1,397 corpora- 
tions made contributions in 1975, 580 of the Nation's largest corpora- 
tions donated 91 percent of the $1,928,349 designated by the FASB 
as coming from the corporate sector. 

Contributions from the other FASB sponsors were much smaller. 
The National Association of Accountants, another organization repre- 
senting business interests, contributed $75,000 in 1975. The American 
Accounting Association, which primarily represents academic ac- 
countants, donated only $6,876. The Financial Analysts Federation 
contributed $7,000. 

Contributions for operating the FASB are made to the FAF which, 
after deducting its small operating expenses, passes the money to the 
FASB. That procedure is intended to create an impression that the 
FASB is insulated from the monetary influence of its sponsors. 
Donations to the FAF are tax-deductible, so the taxpayer partially 
subsidizes operation of the FASB. 

THE FINANCIAL ACCOUNTING STANDARDS BOARD 

The Financial Accounting Standards Board is the private body 
within the accounting establishment which actually sets accounting 
standards. Chart 1 on page 3 shows that the FASB is separated 
from the AICPA and its other sponsors by the FAF. A more detailed 
summary of the FASB's relationship with its sponsors is shown in 
Chart 3 on page 137. 

The FASB's organizational separation from the private interest 
groups sponsoring it is the basis for the claim that it establishes 
accounting standards "independently." However, the separation is 
one in name only. This study finds that the "Big Eight" accounting 
firms, the AICPA and, to a lesser extent, the other sponsoring groups 
have control over the operation of the FASB. Such control is exercised 
in terms of money, personnel, and organizational support. 

The FASB has seven members, and all of them belong to one or 
more of the five sponsoring groups. Six of the seven FASB members 
belong to the AICPA. In 1976, three of the members were from "Big 
Ei.<rht" firms. 

Overall. 23 of the 32 FASB professional staff members belong to 
the AICPA. Ten of the 32 staff members were previously with "Big 
Ei^ht" accounting firms. The concentration of FASB staff members 
identified with the AICPA and the "Big Eight" firms is greater in 
the higher staff positions and the positions which have the most impact 
on the accounting standards issued by the FASB. 

There is a close identity between the leadership of the AICPA and 
the leadership in the FASB organization. The present FASB chair- 
man is a past president of the AICPA. Even the Financial Account- 
ing Standards Advisory Council, which is supposed to provide the 
FASB with a broad spectrum of outside advice, is largely comprised 



16 

of representatives from the same group of big accounting firms, big 
investment firms, big law firms, and big corporations which dominate 
every facet of FASB activity. 

As part of its claim to independent operation in the public interest, 
the FASB has developed rules of procedure for promulgating account- 
ing standards. Those rules generally permit an opportunity for criti- 
cal comment on FASB proposals before they are finally adopted as 
standards. However, they do not overcome the fact that the FASB 
and its staff are not fairly balanced as to the interests represented by 
those persons who perform the work and make the actual decisions 
regarding accounting standards which affect the Federal Government 
and the public. 

An example of the special interest orientation found throughout 
the FASB is the composition of the task forces which perform much 
of the work in researching and developing FASB positions on par- 
ticular accounting issues. The memberships of such task forces are 
largely comprised of outside representatives from large accounting 
firms, corporate clients of "Big Eight'' firms, contributors to the 
FASB, large investment firms, and big banks. The FASB's extractive 
industries task force, which is attempting to develop uniform account- 
ing standards for oil, gas, and mining companies, has 19 identifiable 
outside interests represented on its membership. Seventeen are easily 
identified as having an actual or potential financial interest in the type 
of accounting standards used by extractive industries. 

The FASB has adopted conflict of interest policies "to establish to 
public satisfaction the independence and objectivity of those respon- 
sible for establishing and improving standards of financial accounting 
and reporting.'- Despite its recognition that even the appearance of a 
conflict of interest is enough to undermine public confidence, the 
FASB's policies permit its members and staff to own unlimited 
amounts of investments, such as publicly traded securities, which 
could cause conflicts of interest. Members do not even have to report 
an investment to the FAF trustees unless it iq "material." which the 
annual reporting instructions define as $25,000 or more invested in 
a single company. 

The complete inadequacy of the FASB's policies to prevent conflicts 
of interest is perhaps best illustrated by the recent departure of an 
FASB member from one of the "Big Eisfht" accounting firms who 
resigned prior to the end of his term in order to return to his firm. Hi^ 
resignation apnears to violate an FASB rule prohibiting members 
from entering into formal or informal employment agreements while 
serving on the FASB. It seems doubtful that an FASB member 
would resign with an announcement of his intent to return to his 
previous business affiliation without some formal or informal agree- 
ment that he was wanted back and that there was an acceptable posi- 
tion for him. A "revolving door" arrangement between the FA SB 
and the big accounting firms supporting it has apparently already 
begun. 

A review of the FASB's activities confirms the finding of this study 
that thorp is no reason to expect the FASB to achieve serious reform 
by establishing a system of uniform and meaningful accounting 
standards. Such a svstem is needed to replace the nresent collection of 
flexible, alternative standards which have permitted the growth of 
"creative accounting" as an acceptable option to accurate financial 



17 

reporting. A study sponsored by the AICPA has listed 31 separate 
kinds of business transactions with an aggregate of 80 different ac- 
counting alternatives for reporting the transactions. 

During its three-year existence, the FASB has issued 12 "Statements 
of Accounting Standards." Those standards have addressed account- 
ing problems of varying significance, but they have not resolved such 
problems in a manner which results in meaningful, as well as uniform, 
treatment of specific business transactions. Two of the standards have 
permitted alternative accounting methods, and none of them has seri- 
ously threatened the accounting prerogatives of various special inter- 
est groups in the established business community. 

The FASB has also engaged in a series of private meetings with 
representatives of large accounting firms and big business. Meetings 
have not been held with other segments of the public affected by the 
FASB ? s pronouncements because the FASB only seeks direct con- 
tact with "responsible representatives of groups having a capability 
to nrovide meaningful information and insight concerning the estab- 
lishment of financial accounting standards." Despite its failure to 
seek divergent views and establish a system of uniform and meaning- 
ful accounting standards in the public interest, the FASB and its 
sponsors launched an intensive lobbying campaign to thwart efforts 
by Congress to direct the SEC to establish such accounting standards 
for oil and gas companies. 

THE SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission is thp Federal Govern- 
ment's major participant in the accounting establishment. To an 
astounding degree, the SEC has permitted, and even insisted upon, 
establishment of accounting standards which have substantial impact 
on the Federal Government and the public by self-interested private 
accounting organizations. The result has been an extraordinary 
delegation of public authority and responsibility to narrow private 
interests. 

Chapter IX of this study describes the accounting responsibilities 
of the SEC. The SEC's role ; n t^e present system of setting accounting 
standards is illustrated by Chart 1 on page 3. 

In the Securities Act of 1933 a^d the Securities Exchange Act of 
1934, Con.o-ress directed the SEC to protect the public from false and 
misleading information by reouiring publicly-owned corporations to 
disclose financial and other information in a manner which accurately 
depicts the results of corporate activities. Congress gave the SEC 
broad authority to establish accounting and reporting standards as 
part of its mandate to administer and enforce the provisions of the 
Federal securities laws. Soon after its creation, the SEC decided by a 
three to two vote not to exercise its authority to set accounting 
standards. 

Instead, the SEC decided to rely on accounting standards established 
in the private sector as being protective of the public interest, as long 
as such standards have "substantial authoritative support." During the 
ensuing 40 years, the AICPA has created three bodies to provide such 
support through authoritative pronouncements. A collection of flexible, 
alternative accounting standards — called generally accepted account- 



18 

ing principles — has evolved in the private sector to satisfy the SEC's 
"substantial authoritative support" test. 

After the failure of its previous two standard-setting bodies to 
develop a system of uniform and meaningful accounting standards, the 
AICPA created the FASB in 1972 in an effort to stem criticism of its 
capability to set responsive standards. The SEC issued a policy state- 
ment — Accounting Series Release (ASR) 150 — in 1973 which spe- 
cifically endorses the FASB as the only private body whose standards 
will be recognized by the SEC as satisfying the requirements of the 
Federal securities laws. In effect, the SEC has delegated the establish- 
ment of accounting standards which are binding on all publicly-owned 
corporations to the special interest groups which control the FASB, 
and has reserved a mere oversight role for itself. 

Far from being unhappy with the private sector's failure to establish 
uniform and meaningful accounting standards, the SEC has consist- 
ently defended its delegation of authority to standard-setting bodies 
controlled by the AICPA. In ASR 150, it said : "The determinations by 
these bodies have been regarded by the Commission, with minor excep- 
tions, as being responsive to the needs of investors." That assured state- 
ment was made after the conglomerate takeovers of the 1960s, the 
unanticipated collapse of the Penn Central, and many other problems 
illustrating failures of accounting standards. 

When Congress attempted to achieve uniform accounting standards 
for oil and gas companies in 1975 by directing the SEC to exercise 
its authority to set such standards, the SEC joined with the AICPA, 
the FASB, and other private interest groups in opposing the attempt. 
It undertook an intensive lobbying campaign in a successful effort 
to preserve its delegation of standard-setting authority. The SEC 
demonstrated more concern for protecting the FASB's privileged 
position than for protecting the public from misleading financial 
information. 

Through the years, the SEC has maintained a close relationship 
with the AICPA and its standard-setting bodies. The SEC's chief 
accountants, who greatly influence its accounting policies, have be- 
longed to the AICPA and worked with its committees intended to 
influence the SEC. One was even hired by the AICPA as a consult- 
ant at an annual rate of $60,000 after his retirement from the SEC. 

The SEC has also shown a tendency to treat large accounting firms 
more leniently than individual CPAs and small firms in disciplinary 
actions. Individual CPAs and small firms are routinely suspended from 
practice before the SEC and identified publicly as punishment for 
their improper or illegal acts. The three "Big Eight" firms disci- 
plined by the SEC for similar acts have received relatively mild sanc- 
tions, and the individuals involved were not identified publicly. 

Auditing standards established by the AICPA are recognized by 
the SEC as adequate to assure the accuracy and reliability of corpo- 
rate records supporting information reported to the public. Continual 
revelations of unreported corporate wrongdoing have raised serious 
questions regarding the adequacy of present auditing standards. The 
SEC lias 710 procedures for checking the quality of work by inde- 
pendent auditors in performing their responsibilities under the Fed- 
oral securities laws. 

Arthur Andersen & Co., one of the "Biff Eight" firms, has brought 
suit in Federal court to abrogate the SEC's policy of approving past 



19 

and future standards issued by the FASB. Preliminary findings by 
the court indicate that Congress will have to exercise its authority to 
correct the adverse effects of the SECs delegation of standard-setting 
authority. Action by Congress will also be necessary to restore the op- 
portunity for individuals to sue negligent accountants for damages 
under the Federal securities laws. 

THE U BIG EIGHT'' ACCOUNTING FIRMS AND THEIR CORPORATE CLIENTS 

The last box in Chart 1 on page 3 illustrates the circular pattern 
of self-interest evident in the present system of setting accounting 
standards. The controlling influence of the "Big Eight" accounting 
firms in establishing accounting standards ultimately benefits the 
managements of their corporate clients by assuring that such stand- 
ards will be generally acceptable to them. The "Big Eight'- firms bene- 
fit because the present system enhances the value of their services to 
clients by permitting more flexibility in reporting financial results to 
the Federal Government and the public. 

Unfortunately, accounting standards which permit corporate man- 
agements great flexibility in reporting the results of their business ac- 
tivities have resulted in many cases of inaccurate or misleading finan- 
cial statements. Economic decisions based on such financial statements 
have caused substantial losses to investors, creditors, suppliers, pur- 
chasers and others. To the extent that public policies have been based 
on inaccurate or misleading financial statements, the Federal Govern- 
ment has acted upon illusion rather than fact. 

For example, most Federal revenues are received from taxes com- 
puted on income or asset values. Accounting standards are instru- 
mental in determining such income and asset values. Under the present 
collection of accounting standards, a business can report healthy earn- 
ings or severe losses merely by selecting alternative accounting stand- 
ards. Accounting issues involve social issues such as the fair distribu- 
tion of Federal taxation. 

The FASB represents only the interests of its private sponsoring 
groups. No amount of transferring funds and authority through inter- 
mediate organizations can alter the fact that, in the end. all of the or- 
ganizations are controlled by the same self-interested parties. The in- 
ability to divorce private influence from private control impairs all 
efforts to achieve public confidence in a system which vests public au- 
thoritv in private organizations. 

Allegations of government inefficiency and wastefulness have been 
used to justify retention of the authority to establish accounting 
standards within the private sector. Available evidence, however, indi- 
cates that government agencies arc capable of setting standards 
competently and more efficiently than private organizations. In any 
event, establishing accounting standards involves social issues that 
can be resolved effectively only by authorities responsible solelv to 
the public. 

Congress established the Cost Accounting Standards Board in 1970 
"to achieve uniformity and consistency in the cost-accounting princi- 
ples followed by rlofense contractors and subcontractors under Fed- 
eral contracts." The CASB performs a standard-setting function 



20 

essentially similar to that performed by the FASB, but the CASB's 
staff and budget are approximately half the size of the FASB's. 
Although there are some deficiencies in the CASB's structure and 
procedures, it is performing its task competently overall. The CASB 
is described in Chapter X of this study. 

Chapter XI of this stud} 7 references some materials describing 
problems which have occurred because of improper or ineffective 
accounting and auditing practices. They demonstrate the need for 
accounting and auditing reforms. They also illustrate that account- 
ing issues are information issues, involving the meaning, clarity, and 
amount of information given to Congress and the public regarding the 
activities of major corporations. 

This study shows that there are serious deficiencies in the existing 
accounting establishment. The Federal Government, through the 
SEC, has cooperated in permitting the use of accounting practices 
which have resulted in substantial damage to the public in apparent 
violation of the intent expressed by Congress in the Federal securities 
laws. Reforms are needed to restore public confidence in the accuracy 
and reliability of financial and other information reported by 
publicly-owned corporations. 

Recommendations 

The Federal Government has an important responsibility to ensure 
that publicly-owned corporations are properly accountable to the 
public. Existing accounting practices promulgated or approved by 
the Federal Government have failed to fulfill that responsibility ade- 
quately. The following recommendations are based on the findings of 
this study, and identify actions which should be taken by Congress 
and appropriate Federal agencies in order to achieve efficient and 
effective accounting practices that will promote corporate account- 
ability. 

1. Congress should exercise stronger oversight of accounting prac- 
tices promulgated or approved by the Federal Government, and more 
leadership in establishing proper goals and policies. Broad delegation 
of legislative authority to Federal agencies, which have in turn dele- 
gated broad authority to private interest groups, has been a major 
factor in the establishment of accounting practices which have bene- 
fitted special interests at the expense of the Federal Government and 
the public. As the branch of the Federal Government most directly 
representative of the public, Congress should exercise its authority to 
achieve proper accounting practices. 

2. Congress should establish comprehensive accounting objectives 
for the Federal Government to guide agencies and departments in 
performing their responsibilities. The lack of such objectives has 
permitted divergent and sometimes contradictory accounting prac- 
tices within the Federal Government. It has also contributed to the 
failure to establish uniform and meaningful accounting standards for 
publicly-owned corporations during the past 40 years. 

The Cost Accounting Standards Board has benefitted from its spe- 
cific statutory mandate to achieve "uniformity and consistency" in cost 
accounting standards used by the Federal Government, whereas the 
SEC has never established meaningful objectives for financial account- 



21 

ing standards. A comprehensive set of Federal accounting objectives 
should encompass such goals as uniformity, consistency, clarity, accu- 
racy, simplicity, meaningful presentation, and fairness in application. 
In addition. Congress should establish specific policies abolishing such 
"creative accounting" techniques as percentage of completion income 
recognition, inflation accounting, "normalized" accounting, and other 
potentially misleading accounting methods. 

3. Congress should amend the Federal securities laws to restore the 
right of damaged individuals to sue independent auditors for negli- 
gence under the fraud provisions of the securities laws. Such legisla- 
tion is necessary to overturn the holding of the U.S. Supreme Court 
in Ernst <& Ernst v. Olga Hochf elder, et al., 96 Sup. Ct. 1375 
(March 30, 1976) that "scienter" — the intent to deceive, manipulate, 
or defraud — is a necessary requirement of private actions for damages 
under the fraud provisions of the securities laws. The dissenting 
justices recommended that Congress restore the rights denied indi- 
viduals in order to achieve the remedial intent of the Federal securi- 
ties laws. 

The few independent auditors who perform negligently should be 
held responsible for their actions, and should not be permitted to im- 
pair public confidence in the competence of all independent auditors. 
The Federal Government should not establish any "accountant-client 
privilege" or provisions which would limit the liability of independ- 
ent auditors. Competent independent auditors already are adequately 
safeguarded, and unnecessary restrictions would impede the opera- 
tions of Federal enforcement authorities and courts of law. 

4. Congress should consider methods of increasing competition 
among accounting firms for selection as independent auditors for ma- 
jor corporations. At present, a single accounting firm, nominated by 
management, is placed on the ballot of annual meetings of stock- 
holders. Domination of the corporate election process by large institu- 
tional investors and management ensures that the accounting firm 
nominated by management is elected. Lono- association between a cor- 
poration and an accounting firm may lead to such close identification 
of the accounting firm with the interests of its client's management 
that truly independent action by the accounting firm becomes difficult. 

One alternative is mandatory change of accountants after a given 
period of years, or after any finding by the SEC that the accounting- 
firm failed to exercise independent action to protect investors and the 
public. Another alternative is amendment of the Federal securities 
laws to require that more than one accounting firm be on the ballot 
at annual meetings of stockholders. The mechanism for achieving this 
choice for stockholders could be a requirement that stockholders with 
voting rights to a given, small percentage of the stock would be en- 
titled to nominate an accounting firm as the independent auditor. 
Holders of a limited number of shares a ] so could be permitted to vote 
for thpir own representative on a corporation's audit committee. 

5. The Federal Government should directlv establish financial ac- 
counting standards for publiclv -owned corporations. Accounting 
standards involve social and economic issues which can only be re- 
solved effectively through the processes of government responsible 
solely to the public. Furthermore, all segments of the public affected 



22 

by accounting standards should be represented in the decision-making 
process. 

As intended by Congress in the Federal securities laws, the SEC 
provides a public forum for setting accounting standards through its 
rule-making procedures. However, the SEC's long association with 
the private accounting establishment and insistent determination to 
rely upon its accounting pronouncements cast substantial doubt on the 
SEC's ability to establish accounting standards which would restore 
public confidence in corporate financial reporting. 

Other alternatives would be to establish financial accounting stand- 
ards through a Federal board similar in operation to the CASB or 
establishment of accounting standards by the General Accounting 
Office. Public participation and strong oversight by Congress are 
essential to safeguarding the public interest in any standard-setting 
procedure adopted. 

6. The Federal Government should establish auditing standards 
used by independent auditors to certify the accuracy of corporate 
financial statements and supporting records. Again, participation by 
all segments of the public is necessary to develop auditing standards 
that will restore public confidence in the integrity of corporate reports. 
In view of the substantial record of previously unreported corporate 
wrongdoing which has been revealed during the past few years, a spe- 
cial review of present auditing standards should be undertaken to de- 
termine their adequacy prior to considering their adoption by the 
Federal Government. Auditing standards could be established by the 
General Accounting Office, the SEC, or by Federal statute. 

7. The Federal Government should itself periodically inspect the 
work of independent auditors for publicly-owned corporations. Such 
a mandatory inspection program should be designed to provide assur- 
ance to the public and Congress that independent auditors are per- 
forming their responsibilities competently in accordance with proper 
standards of conduct. Periodic quality reviews could be conducted by 
the General Accounting Office, the SEC, or a special audit inspection 
agency. 

8. The Federal Government should restore public confidence in the 
actual independence of auditors who certify the accuracy of corporate 
financial statements under the Federal securities laws by promulgating 
and enforcing strict standards of conduct for such auditors. Those 
standards should specifically prohibit activities by auditors which 
impair their independence in fact or appearance. Direct or indirect 
representation o,f clients' interests and performance of non-accounting 
management advisory services for public or private clients are two 
activities which are particularly incompatible with the responsibilties 
of independent auditors, and should be prohibited by Federal stand- 
ards of conduct. 

The SEC is the appropriate agencv to promulgate and enforce 
standards of conduct under its authority to determine the qualifica- 
tions of independent auditors. 

9. The Federal Government should require the Nation's 15 largest 
accounting firms to report basic operational and financial data an- 
nually. Those firms operate as partnerships and are not reouired to 
report such information to the public, but they perform public respon- 
sibilities as independent auditors for the vast majority of the Nation's 



23 

sizable publicly-owned corporations. Congress and the public need 
basic information on the organization, activities and financial status 
of the 15 largest accounting firms in order to evaluate their perform- 
ance of important public responsibilities under the Federal securities 
laws. 

The subcommittee collected certain basic information on the "Big 
Eight" accounting firms, but this study finds that there is a need for 
more comprehensive information to be collected by the Federal Gov- 
ernment on an annual basis. Such information should clearly disclose 
the financial position, operations, and various activities of large ac- 
counting firms. The appropriate Federal agency to collect such infor- 
mation is the SEC. 

10. The Federal Government should define the responsibilities of 
independent auditors so that they clearly meet the expectations of 
Congress, the public, and courts of law. Independent certification con- 
cerning the accuracy of corporate records and the fair presentation of 
financial information is essential to successfully protecting the public 
through adequate disclosure of corporate activities, as intended by 
Congress in the Federal securities laws. The independent auditor's 
certification included in corporate reports should be understood by all 
auditors to mean that financial information is presented fairly and 
that corporate records are complete and accurate. 

Independent audits that do not ensure fairness and accuracy are 
useless as a basis for public reliance upon information disclosed by 
publicly-owned corporations. Limited responsibility audits that pro- 
vide only vague indications of fairness and accuracy, which are 
advocated by certain segments of the accounting establishment, 
result in substantial costs without achieving the assurance necessary 
to make the present disclosure system operate effectively. If independ- 
ent auditors cannot provide proper certification of information 
reported by publicly-owned corporations, then the Federal Govern- 
ment should seek alternative methods of performing that necessary 
function. 

11. The Federal Government should establish financial accounting 
standards, cost accounting standards, auditing standards and other 
accounting practices in meetings open to the public. Accounting prac- 
tices involve broad social and economic issues which should not be 
decided in private, and do not qualify as exemptions under Federal 
statutes regarding open meetings. 

12. The Federal Government should act to relieve excessive concen- 
tration in the supply of auditing and accounting services to major 
publicly-owned corporations. The Department of Justice and the Fed- 
eral Trade Commission should investigate and determine whether 
violations of the Federal antitrust laws have resulted from excessive 
concentration in the supply of such services among all industries or 
within specific industries. Congress should consider other methods of 
reducing concentration in the supply of auditing and accounting serv- 
ices to major corporations. 

13. The Federal Government should retain accounting firms which 
act as independent auditors only to perforin auditing and accounting 
services. The Federal Government should not contract witli such firms 
for the performance of management advisory services or other con- 



24 

suiting services which are incompatible with the responsibilities of 
independent auditors. 

14. The Securities and Exchange Commission should treat all inde- 
pendent auditors equally in disciplinary and enforcement proceedings 
under the Federal securities laws. Large accounting firms and their 
partners should receive the same sanctions as individual CPAs and 
small firms for similar offenses. The SEC and other Federal agencies 
should not rely on private parties and organizations to conduct com- 
pliance reviews ordered as a result of disciplinary or enforcement pro- 
ceedings, but should conduct such reviews themselves. Public 
confidence in the enforcement of Federal statutes and regulations is 
impaired when public responsibility is delegated to private parties 
and organizations which may be self-interested. 

15. The membership of the Cost Accounting Standards Board 
should not be dominated by representatives of industry and account- 
ing firms which may have vested interests in the standards established 
by the board. By statute, industry is guaranteed one position on the 
five-member CASB, and the remaining two appointed members from 
the private sector should be independent of real or potential conflicts 
of interest. The appointed member from the Federal Government 
should be rotated among the many Federal departments and agencies 
affected by CASB standards, and should not always represent the 
Department of Defense. 

16. Federal employees should not serve on committees of the Amer- 
ican Institute of Certified Public Accountants or similar organizations 
that are assigned to directly or indirectly influence accounting policies 
and procedures of the Federal Government. Federal employees should 
remain free from the appearance of conflicts of interest regarding the 
fair and objective performance of their public duties. 



CHAPTEE I. THE "BIG EIGHT" ACCOUNTING FIRMS 

Introduction 

The accounting profession is dominated by eight giant accounting 
firms, collectively known within the business and financial community 
as the "Big Eight." The "Big Eight" are so large and influential in 
relation to other CPA firms that they are able to control virtually all 
aspects of accounting and auditing in the United States. 

Listed alphabetically, the names and addresses of the "Big Eight" 
accounting firms are as follows : 

Arthur Andersen & Co., 69 West Washington Street, Chicago, Illi- 
nois 60602. 

Arthur Young & Co., 277 Park Avenue, New York, New York 10017. 

Coopers & Lybrand, 1251 Avenue of the Americas, New York, New 
York 10020. 

Ernst & Ernst, 1300 Union Commerce Building, Cleveland, Ohio 
44115. 

TJo skins & Sells, 1114 Avenue of the Americas, New York, New York 
10036. 

Peat, Marwick, Mitchell & Co., 345 Park Avenue, New York, New 
York 10022. 

Price Waterhouse & Co., 1251 Avenue of the Americas, New York, 
New York 10020. 

Touche Ross & Co., 1633 Broadway, New York, New York 10010. 

The "Big Eight" firms exercise influence far beyond that which is 
indicated by the number of CPAs they emruov. or the number of 
clients they audit, For example, the American Institute of Certified 
Public Accountants (AICPA)* estimates there were 150,000 to 160,000 
CPAs licensed to practice in the United States at the end of 1975. 
About 118,000 CPAs are members of the AICPA. Of that number, 
approximately 17,400 or 15 percent of the AICPA members nre a<=sooi- 
ated with the "Bi^ Eight" accounting firms. Thus, the "Biff Eight" 
firms have only 11 or 12 percent of the Nation's CPAs working for 
them. 

The source of the tremendous influence wielded by the "Biq: Eight" 
accounting firms is related to tho size and influence of their clients, 
rather than to the number of individual accountants associated with 
these firms. The vast majority of large corporation?, which control 
the bulk of the Nation's business wealth, employ one of the 'Big 
Eight" firms as their independent auditor. Fees for accounting services 
are related to the size of the business for which such services are per- 
formed. Thus, big clients provide the "Big Eight" with the oppor- 
tunity to earn big accounting fees. 



*The AICPA is the largest and most prestigious professional organization renresenting 
the interests of CPAs. The manner in which the AICPA is dominated by : lie "Big Eight" 
is described fully in subsequent sections of this study. 

(25) 



26 

The amount of wealth received by the "Big Eight" firms through 
fees for their services is to some extent proportionate to the amount of 
economic wealth controlled by their clients. Since their clients control 
a large proportion of the Nation's economic wealth, the "Big Eight" 
accounting firms receive the substantial accounting fees associated 
with that wealth. Revenues generated by the practice of accounting in 
the United States are concentrated among the "Big Eight" accounting 
firms in the same way that the Nation's economic wealth is concen- 
trated among their clients. 

There are three distinct methods by which the "Big Eight" firms are 
able to use their wealth and position to influence economic and social 
events in the United States. As will be shown throughout this study, 
the "Big Eight" accounting firms actively use all three methods to pro- 
mote their interests. 

(1) "Big Eight" firms are able to exercise substantial influence di- 
rectly because of their size and their considerable financial resources. 
Apart from their partners and principals, they collectively employ 
over 48,000 people. The "Big Eight" accounting firms had estimated 
total gross revenues of over $2 billion in 1975, with net earnings ap- 
proximating more than $500 million. The total employment and finan- 
cial resources directly controlled by the "Big Eight" are very substan- 
tial, but there is an unequal distribution of those resources among them 
because the eight firms are of differing sizes. 

(2) The influence of the "Big Eight" firms is also exercised through 
independent organizations. As described subsequently, the AICPA is 
so thoroughly dominated by the "Big Eight" firms that it has become 
a conduit for collectively expressing their views and promoting their 
interests. The American Accounting Association is also influenced by 
the "Big Eight" firms through financial support and individual mem- 
bership. Thus, the "Big Eight" are able to use their influence to affect 
the activities of independent organizations, and avoid the appearance 
of directly promoting their own interests. 

(3) Finally, the "Big Eight" are able to exercise substantial influ- 
ence indirectly through their clients. Decisions made by these firms on 
auditing and accounting matters have an important impact on the 
economic and social activities of their clients. The large corporate 
clients of the "Big Eight" heavily influence the economy, as well as 
society in general. Accounting is the language by which businesses 
report the results of their activities, and the "Big Eight's" dominion 
over the language of accounting used by their clients is a source of 
great influence for these firms. 

The "Big Eight" accounting firms perform a variety of manage- 
ment advisory services in addition to tax advice, auditing, and other 
accounting services. Management advisory services offered by them in- 
clude executive recruitment, product and market analysis, plant layout, 
actuarial services, and financial management services. All of the "Big 
Eight" firms employ specialists who are not CPAs to increase their 
expertise in the performance of management advisory services. The 
"Big Eight" are much more than just accounting firms. 

There are many basic similarities among the "Big Eight" accounting 
firms, and they are often grouped together for the purpose of 
describing their activities. While it is useful to describe the activities of 
the "Big Eight" firms as a group, they are not equal in all respects. 



27 

They do not all offer exactly the same services, and their clients are not 
all of the same size or quality. In terms of annual revenues, the "Big 
Eight" accounting firms are of varying sizes, probably ranging from 
less than $200 million to more than $500 million for individual firms. 
Analysis of the information collected by this subcommittee illustrates 
some of the differences, as well as the similarities, among the "Big 
Eight" firms. 

Because of their extensive influence and their roles as the independ- 
ent auditors for the Xation's largest corporations, the "Big Eight" ac- 
counting firms have a great impact on accounting practices which are 
promulgated or approved by the Federal Government. Their broad 
range of political activities and management advisory services also 
affect policies and programs of the Federal Government. Thus. 
Congress and the public must have knowledge of the "Big Eight" 
accounting firms and their activities in order to properly formulate 
Federal policies and accounting practices which are significantly af- 
fected by the "Big Eight" firms. 

Subcommittee Requests for Information 

This subcommittee began its present study of the relationship be- 
tween the accounting profession and Federal accounting practices be- 
cause there was a clear need for reliable information concerning the 
accounting profession and its activities. Unfortunately, reliable in- 
formation on the accounting profession is not regularly available to 
Congress and the public because CPAs generally practice accounting 
as business partnerships. Business partnerships are not required to re- 
port publicly any information on their financial standing, or their 
activities. Unlike publicly-owned corporations, business partnerships 
may reveal to the public only such information as they desire. 

Preliminary research and inquiries by the subcommittee staff to 
members of the accounting profession indicated that the only way for 
this subcommittee to obtain reliable information on the accounting 
profession would be to request such information directly from ac- 
counting firms themselves. Accordingly, a questionnaire requesting 
basic information on accounting firms was prepared and sent to each 
of the "Big Eight" accounting firms on December 19, 1975. (See 
Appendix A, p. 191.) The subcommittee sent its initial questionnaire 
only to the "Big Eight" firms because it was believed those firms would 
be able to provide this subcommittee with the bulk of the information 
needed to perform its study of Federal accounting practices. 

The responses of the "Big Eight" firms to the subcommittee's 
December 19, 1975 questionnaire are included in Appendix A, p. 196. 
Although the information requested was basic descriptive data and did 
not involve disclosure of trade secrets, two of the "Big Eight" firms 
asked that their responses be kept confidential. Cooper- & Lvbrand 
requested partial confidentialitv for its response, but "reluctantly" 
acquiesced when informed of the open resnonses by six other firms. 
(See Appendix A, p. 288.) Touche Ross & Co. originally asked that its 
entire response be kept confidential, but finally agreed to permit pub- 
lic use of all information except data relating to amounts of Federal 
contracts performed by the firm. (See Appendix A. p. 404.) 

Information which cannot be disclosed to Members of Congress and 
the public is useless as a means of informing them about the sub- 



28 

stantial impact of major accounting firms on Federal accounting 
practices. This subcommittee cannot fulfill its responsibilities by col- 
lecting information needed by Congress and the public, and then re- 
fusing to make such information available to them. Information on 
Federal contract expenditures is not confidential, but the subcommit- 
tee granted the Touche Ross & Co. request in order to expedite com- 
pletion of the initial phase of the subcommittee's study of Federal 
accounting practices. 

This subcommittee sent two supplemental requests for information 
to the "Big Eight" accounting firms. By letter of 8 April, 1976, the 
subcommittee asked for copies of any testimony or presentations 
by each "Big Eight" firm before Congress, a State legislature, or a 
Federal or State regulatory commission since 1 January, 1975. (See 
Appendix C, p. 569.) All of the "Big Eight" firms cooperated in 
providing that information, although a few firms did not respond 
completely. 

The subcommittee's request for public testimony and presentations 
covered a time span of only 15 months. However, the subcommittee 
received a large volume of materials in response to its request due to 
abundant activity by "Big Eight" firms in this area. The subcom- 
mittee staff has reviewed all of the materials submitted, and some 
examples of the materials received are included in Appendix C. 
They are described and referenced subsequently in this study. 

The last subcommittee request for information from the "Big 
Eight" was by letter of 7 June, 1976. (See Appendix D, page 845.) 
That letter asked for data on the annual compensation received by 
each of the three highest paid individuals in each firm, and the 
number of women and blacks who are partners of each firm. A3 sub- 
sequently described in this document, certain Federal agencies rely 
on private organizations dominated by the "Big Eight" firms to 
perform important public responsibilities assigned to those agen- 
cies. Congress and the public need to know the financial interests of 
private groups which perform public responsibilities assigned to 
Federal agencies. They must also know whether such private groups 
adequately represent all sectors of the public. 

Only Arthur Andersen & Co. and Price Waterhouse & Co. re- 
sponded completely to the subcommittee's 7 June, 1976 request. Five 
of the remaining firms refused to provide information on the compen- 
sation earned by their three highest paid partners, but did provide 
information on their number of women and black partners. Toucho 
Ross & Co. refused to provide anv information at all. The responses 
of the "Big Eight" firms are included in Appendix D beginning on 
pa^e 847. 

One of the primary functions of this study is to provide a ready 
source of information to Congress and the public on the relationship 
between the accounting profession and the Federal Government. 
Much of this information has been unavailable previously to either 
Congress or the public. This subcommittee has used its resources to 
collect some basic information on major accounting firms which should 
be publiclv available. 

Part of the data used in this studv included information on other 
major accounting firms in addition to the "Big Eight" firms. Some 
sections of this document provide information on the next seven 
largest accounting firms after the "Big Eight." Those seven firms 



29 

are placed by the AICPA in the largest-size category for its advisory 
committees, along with "Big Eight" firms. The 15 largest accounting 
firms in the Nation are a useful and reasonably complete grouping 
for purposes of measuring the influence of major accounting firms on 
the Federal Government. 

At times, this study will refer to the next seven largest accounting 
firms in the Nation after the "Big Eight" firms. Listed alphabetically, 
the names and addresses of the next seven largest accounting firms 
are as follows: 

Alexander Grant & Co., 1185 Avenue of the Americas, New York, 
New York, 10036. 

Hurdman and Cranstoun, 140 Broadwav, New York. New lork 
10005. 

J. K. Lasser & Co., 10 East 53rd Street. New York, New York 10022. 

Laventhol & Horwath, 919 Third Avenue, New York. New York 
10017. 

S. D. Leidesdorf & Co., 100 East 42nd Street. New York. New 
York 10017. 

Main Lafrentz & Co., 280 Park Avenue, New York. New York 
10017. 

Seidman & Seidman, 15 Columbus Circle. New York, New York 
10023. 

Other Information on the "Big Eight" Accounting Firms 

The subcommittee has also received information concerning the 
activities of "Big Eight" firms from sources other than the "Big 
Eight" themselves. Information was requested from the AICPA. 
the Financial Accounting Standards Board (FASB) and its private 
sponsoring groups, certain Federal agencies, and various other public 
and private sources. A maior portion of that information is included 
in this study, and is described and referenced in subsequent sections. 

The subcommittee staff has held numerous discussions with repre- 
sentatives of "Big Eight" firms, members of other accounting firms. 
Federal officials, and representatives of the AICPA and the FASB. 
Many articles, newspaper reports, public statements, and government 
reports have been reviewed. Unsolicited information has also been 
received by the subcommittee. 

Arthur Andersen & Co. has published an annual report for the 
past three years giving some detail on its activities. The information 
reported by Arthur Andersen & Co. is intended to promote the firm's 
own interests, and is not verified by any outside sources. Allowing for 
those limitations, however, the Arthur Andersen & Co. annual report 
is a useful source of information on the activities of one "Big Eight" 
firm. It is also useful as a gauge for evaluating the information sub- 
mitted by other "Big Eight" firms. Copies of the Arthur Andersen 
& Co. annual report may be obtained directly from that firm. 

Size of the "Big Eight" Accounting Firms 

The subcommittee has condensed much of the information it col- 
lected from the "Big Eight" firms into Table I on page 30. The table 
facilitates comparisons among the firms and illustrates their sub- 
stantial size, both individually and collectively. 



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32 

The "Big Eight" firms all have strong national and international 
operations with many offices throughout the United States and the 
world. For example, Table I shows that the number of offices in the 
United States operated by "Big Eight'- firms ranges from Arthur 
Andersen & Co.'s 48 offices in 31 States and territories to Ernst & 
Ernst's 112 offices in 45 States and territories. The average number of 
domestic offices operated by a "Big Eight" firm is 80 offices in 38 States 
and territories. 

Each of the "Big Eight" firms maintains an extensive network of 
offices and affiliations outside the United States. As shown by Table 
I, the number of international offices and affiliations ranges from 58 
for Arthur Andersen & Co. to 242 for Coopers & Lybrand. Four of the 
firms each have more than 100 international offices and affiliations. 

The number of major corporations for which "Big Eight" firms 
serve as the independent auditor is also impressive. Of the 2,641 cor- 
porations listed on either the New Vork Stock Exchange or the 
American Stock Exchange in 1974, 2,248 or 85 percent are audited 
by one of the "Big Eight" accounting firms. (See Appendix B, 
p. 411.) In addition, Table I on page 30 shows that the "Big 
Eight" firms audit several thousand other publicly and privately 
owned businesses. 

"Big Eight" firms have many partners and employ large staffs to 
perform services for their clients. In the United States, Price Water- 
house & Co. has the fewest partners (348), and Peat, Marwick, 
Mitchell & Co. has the most (791). Most of the firms have between 
400 and 525 partners. Partners are responsible for the results of serv- 
ices performed by accounting firms. 

Table I shows that Arthur Andersen & Co. has the largest staff 
(8,554). Touche Ross & Co. has the smallest staff (4,219). Excluding 
partners and principals, the "Big Eight" firms collectively employ 
a total of 48,515 people. The majority of employees are professional 
staff, and the remainder are clerical employees. 

Considering that most CPAs practice accounting with fewer than 
10 partners, the "Big Eight" accounting firms are truly giant organi- 
zations. With operations spanning the United States and the world, 
they are the counterpart in the field of accounting to the multinational 
corporations in the business field. The supply of accounting services 
for major international corporations is essentially concentrated among 
only the "Big Eight" accounting firms. 

Services Offered by the "Big Eight" Accounting Firms 

The "Big Eight" accounting firms offer a broad range of services to 
clients and potential clients. They offer services which have tradi- 
tionally been performed by CPAs, as well as additional non- account- 
ing services. 

The responses of the "Big Eight" firms to information requests by 
this subcommittee provide some detail on the types of services they 
perform. Table I on page 30 shows the percentage of total revenues 
earned by each firm from the performance of specific services. The 
major categories of services performed by "Big Eight" firms are 
auditing and accounting services, tax services, and management advi- 
sory services. 



33 

AUDITING AND ACCOUNTING SERVICES 

Auditing and accounting services involve designing a reliable sys- 
tem of recordkeeping for businesses, checking the recordkeeping sys- 
tem periodically to assure that it is effective, providing assistance 
in presenting financial information so that it accurately conveys the 
results of business activities, and certifying financial statements for 
accuracy. These are the basic services which have been performed tra- 
ditionally by the accounting profession. The need for expertise in 
providing such services to businesses is the primary reason for the 
development of the accounting profession and the licensing of CPAs. 

Enactment of the Federal securities laws in 1933 and 1934 amplified 
the need for effective auditing and accounting services by qualified 
independent accountants. Because their major clients are publicly- 
owned corporations, the "Big Eight'' firms have been especially af- 
fected by the Federal securities laws. Auditing and accounting serv- 
ices performed by independent auditors under the Federal securities 
laws were intended to benefit the public, rather than the managements 
of the businesses being audited. The requirement that independent 
auditors be primarily responsible for protecting investors, creditors, 
and other third parties has created a special position in society for 
CPAs who choose to act as independent auditors. They are supposed 
to provide independent certification that publicly-owned corporations 
are accurately presenting the results of corporate activities. 

Auditing and accounting services performed by "Big Eight" ac- 
counting firms for publicly-owned corporations are optimally bene- 
ficial to both corporate managements and outside parties, all of whom 
should be interested in having an accurate presentation of corporate 
financial results. Corporate managements should benefit by having ac- 
curate information for use in operating their businesses more effi- 
ciently. Outside parties, such as investors, creditors, and governmental 
authorities, should benefit because they may safely rely upon the inde- 
pendently audited information reported by corporation.-. 

Performance of traditional auditing and accounting services as the 
independent auditors for the vast majority of the Nation's large cor- 
porations is the most important source of revenues for the "Big Eight" 
accounting firms. On the average, approximately TO percent of the 
revenues received by a "Big Eight" firm results from performing 
auditing and accounting services. Price Waterhouse & Co. ranks high- 
est in this regard, at 76 percent of total revenues, and Touche Koss & 
Co. ranks the lowest, at 62 percent of total revenues. 

TAX SERVICES 

Tax services are another important source of revenues for CPAs. 
The "Big Eight" firms average about 18 percent of their total revenues 
from the performance of tax services. 

Touche Ross & Co. derives the highest proportion of total revenues 
from performing tax services (24 percent). Haskins & Sells ranks low- 
est in this comparison, deriving 15 percent of total revenues from tax 
services. 

The performance of tax services has grown more important as a rev- 
enue source because tax provisions at the Federal. State and local levels 



34 

have become more complex during the past 25 years. As governments 
increasingly have used tax laws to achieve economic and social goals, 
expertise in tailoring business operations to maximize the benefits 
available under the tax laws has become a valuable financial resource 
to businesses. 

MANAGEMENT ADVISORY SERVICES 

Performance of management advisory services has also become an 
important source of revenues for the "Big Eight" accounting firms. 
The relative importance of management advisory services to revenues 
ranges from 5 percent of total revenues for Haskins & Sells to 16 per- 
cent of revenues for Arthur Andersen & Co. The average for the firms 
is about 11 percent of total revenues. 

All of the "Big Eight" accounting firms employ specialists who are 
not CPAs to perform management advisory services. Many of the sen- 
ior specialists have become "principals'' in the "Big Eight" accounting 
firms. Only CPAs may legally become partners in a CPA firm, but 
the "principals" who are not CPAs enjoy most of the same benefits as 
the partners in "Big Eight" firms. 

Table I on page 30 shows that the number of "principals" employed 
by a "Big Eight" firm tends to parallel the proportion of total rev- 
enues derived from performing management advisory services. Has- 
kins & Sells has only 12 "principals" who are not CPAs, but Arthur 
Andersen & Co. has 65, and Peat, Marwick. Mitchell & Co. has 90 
"principals." The "Big Eight" firms collectively employ a total of 332 
"principals" who occupy senior positions within the firms, but are not 
CPAs. 

This subcommittee asked each of the "Big Eight" firms if it pro- 
vided certain specified types of management advisory services. The 
firms* responses are summarized in Table I. Arthur Andersen & Co. 
performs a substantial amount of management advisory services, but 
does not perform any of the services specified by the subcommittee 
in its questionnaire. The following is a brief description of the pri- 
mary types of management advisory services performed by large 
accounting firms, along with the number of "Big Eight" firms that 
provide each service. 

Executive Recruitment. — All of the "Big Eight" firms except 
Arthur Andersen & Co. provide executive recruitment services. This 
service involves either finding a new executive to satisfy a client's 
particular needs, or finding a suitable position at another company for 
an executive who is no longer needed by a client. 

The "Big Eight" firms are generally involved with recruiting 
high-level executives to occupy senior management positions. Because 
of their broad range of business connections and their reputations as 
auditors for providing expert financial services, the "Big Eight" firms 
are a natural source of inquiry for clients seeking important execu- 
tives. The "Big Eight" firms have capitalized on their position of in- 
fluence by marketing executive recruitment services. 

Marketing Analysts. — Marketing analysis involves performing 
studies to determine the feasibility of selling a client's products or 
services to a particular market. This service may include identifying 
likely customers, surveying the attitudes of consumers, or finding 



35 

areas of excess disposable income. Four of the "Big Eight" firms 
provide marketing analysis services. 

Plant Layout.— Plant layout services involve organizing clients 
plant facilities to maximize their productive capabilities. This service 
includes providing expertise in efficiently organizing physical plants, 
as well as recognizing the best ways to maximize employee resources 
within a plant complex. Four of the "Big Eight'' firms provide plant 
layout services. 

Product Analysis. — This service involves analyzing a client's prod- 
uct to determine its value to customers who may be interested in pur- 
chasing the product. Three of the "Big Eight" firms provide product 
analysis services. 

Actuarial Services. — Actuarial services involve forecasting how 
much money must be contributed from a client's earnings each year 
to fund its pension program on a sound financial basis. Client com- 
panies with pension plans for their employees are required to fund 
their pension programs over a number of years on a financially sound 
basis. Actuarial services are provided by three of the "Big Eight" 
firms that have acquired actuarial firms through mergers. 

Financial Management Services. — Although this subcommittee did 
not ask the "Big Eight" firms in its questionnaire if they perform 
financial management services, subsequent conversations with mem- 
bers of "Big Eight" firms indicate that all of them provide such 
services. Financial management services involve designing and im- 
plementing electronic data processing and other services which help 
managements of client companies make financial decisions. Computer 
forecasting models and inventory control systems are examples of 
financial management services. 

The "Biaf Eight" accounting firms provide a broad range of services 
traditionally performed by CPAs, as well as non-accounting services 
which are performed by management consulting firms. The rapid 
growth of management advisory services as a source of revenues for 
"Big Eight" firms has impaired their ability to act as independent 
auditors for publicly-owned corporations. The "Big Eight" firms are 
involved in providing management advisory services to varying de- 
grees, but all of the firms derive substantial revenues from perform- 
ing such services. 

Concentration of Major Corporate Clients Among the "Big 

Eight" Accounting Firms 

In its 19 December, 1975 questionnaire to the "Big Eight" account- 
ing firms, this subcommittee requested the names of their corporate 
clients that have securities listed on either the New York Stock Ex- 
change or the American Stock Exchange. All of the "Big Eight" firms 
provided that information in their responses which are contained in 
Appendix A. 

The subcommittee requested that information because it is well- 
known that all of the major corporations in the United States have 
securities listed on either the New York Stock Exchange or the Amer- 
ican Stock Exchange. It is also generally recognized that most of the 
major corporations in the United States employ one of the "Big 



36 

Eight" accounting firms as their independent auditor. There is a need 
for Congress and the public to have reliable data on the extent to 
which the "Big Eight" accounting firms dominate the auditing of the 
Nation's largest corporations. 

The Congressional Research Service of the Library of Congress was 
requested by the subcommittee to tabulate and evaluate the data on 
major corporate clients that was submitted by the "Big Eight" ac- 
counting firms. The Library of Congress report is included in Appen- 
dix B at page 407. The manner in which the Congressional Re- 
search Service performed its evaluation is described within the body 
of the report. 

The findings of the Congressional Research Service show an extra- 
ordinary degree of concentration among the "Big Eight" firms in pro- 
viding auditing services to major corporations. This section briefly 
summarizes the primary findings by the Congressional Research 
Service. Reference should be made to the full report for its complete 
findings, along with an extensive amount of relevant financial and 
employment data developed by the Library of Congress. There are 
also many bar graphs and circular charts to illustrate the comparative 
significance of the factual data. 

CRS METHODOLOGY 

At the outset, two factors should be noted concerning the complete- 
ness and the accuracy of the Library of Congress report. The data 
sources used by the Congressional Research Service and its consultants 
are incomplete with regard to some companies and certain types of 
data for other companies. The report notes the companies for which 
no data was found, and the certain types of data which were not found 
for other companies. 

Much of the information not found by the Congressional Research 
Service through its data sources is available to the public from other 
sources. Moody's Investors Service contains some of the missing data, 
and is available in most public libraries. All of the corporations listed 
on the Xew York Stock Exchange and the American Stock Exchange 
are publicly-owned and must file Rnnva 1 reports which contain much 
of the missing data with the SEC. Regulated companies also file useful 
information with Federal and State refill a torv commissions. 

Most of the 155 corporations for which the Congressional Research 
Service found no data are small in relation to the many large corpora- 
tions which account for the bulk of financial and employment data 
on the Xew York Stock Exchange and the American Stock Exchange. 
Similarly, the only type of data which is significantly deficient for 
corporations with partial data is employment information. Thus, the 
impact of the missing information on the findings of the Congressional 
Research Service is insignificant in all categories except employment. 

Interested persons may augment the data developed by the Congres- 
sional Research Service from other public information sources. The 
important point is that the missing information would increase the 
numbers used by the Congressional Research Service in its analysis 
of "Big Eight" firm dominance. Therefore, the findings of the Con- 
gressional Research Service are understated to the extent that missing 
data was not available for its analvsis. The dominance of the "Big 



37 

Eight" firms in all categories is even greater than shown by the Library 
of Congress report, and is significantly greater concerning the number 
of employees hired by corporate clients of the "Big Eight" firms. 

Another problem arose concerning the accuracy of the Library of 
Congress report because 24 corporations were claimed as clients by 
more than one "Big Eight" accounting firm. Those corporations and 
the "Big Eight" firms claiming them as clients are listed in Attachment 
2 of the report. As noted in the report, the Congressional Research 
Service counted each of those 24 corporations as clients of both "Big 
Eight" firms claiming them as clients. 

Because those 24 corporations appeared on the client lists of two 
"Big Eight" firms, their individual financial and employment data 
was included in the Congressional Research Service analysis of each 
"Big Eight" firm claiming them as a client. Thus, there is a very small 
amount of double-counting in the Congressional Research Service 
analysis. 

The subcommittee staff checked with one of the "Big Eight" firms 
to discover why seven of its clients were also listed as clients of other 
"Bier Eight" firms. It was found that the primary reason is the timing 
difference when a corporation changes from one "Big Eight" auditor 
to another. Unless all of the "Big Eight" firms list their clients as of 
the same date, a corporation changing auditors may appear on more 
than one client list. 

The financial and employment data of the 24 double-counted corpo- 
rations is small in relation to the total data used by the Congressional 
Research Service in its analysis, and the result of double-eountino- their 
data has no significant effect on the Congressional Research Service 
findings. 

The Congressional Research Service analysis accurately portrays 
the total domination of the "Big Eight" firms as independent audi- 
tors of the corporations listed on the New York Stock Exchange and 
the American Stock Exchange. The analysis shows the vast economic 
impact of the "Big Eight" firms' corporate clients in terms of sales, net 
income, taxes, employees, and assets. Each of the "Big Eight" account- 
ing firms is evaluated according to the economic strength of its cor- 
porate clients. 

TOWERS AND RESPONSIBILITIES OF INDEPENDENT AUDITORS 

The powers and responsibilities of the "Big Eight" firms as inde- 
pendent auditors should be noted when interpreting the findings in the 
Library of Congress report. Each of the corporations identified as 
clients of the "Bio: Ei<rht" firms must have its financial statements cer- 
tified for accuracy by the "Big Eight" firm retained as its independent 
auditor. The independent auditor must agree that the accounting 
methods used by a corporate client result in a fair presentation of the 
corporation's financial affairs. 

At present, there is flexibility in the type of accounting methods 
which may be used by a corporation to record the same busi- 
ness transaction. It can be vitally important to a corporation to have an 
independent auditor who agrees that a certain accounting method is 
proper when applied to a specific business transaction, and that fi- 
nancial statements using the desired accounting method accurately 



38 

portray the results of corporate operations. The financial results of 
corporate activities reported to the public can differ dramatically, de- 
pending on the type of accounting methods used to record business 
transactions. 

Within the flexible guidelines presently used by independent audi- 
tors, a "Big Eight'' lirm has an extensive amount of discretionary 
authority to approve or disapprove the use of a certain accounting 
method to record a specific business transaction. Agreement by the 
independent auditor with a client's management on accounting mat- 
ters can mean the difference between reporting healthy profits or 
severe losses. Professor Briloff's statement in Appendix K at page 1609 
describes several cases where agreeable independent auditors per- 
mitted corporate clients to report "profits' ' that did not exist. 

The power of approval over accounting methods used by corporate 
clients in financial statements is only part of the influence wielded 
by "Big Eight" accounting firms. As described in subsequent sec- 
tions of this study, the "Big Eight" firms have strong influence over 
the promulgation of accounting methods that are available for use 
by corporate clients in the first place. The AICPA, which is con- 
trolled by the "Big Eight" firms, controls the Financial Accounting 
Standards Board which establishes acceptable accounting methods. 

As independent auditors, the "Big Eight" firms are also responsible 
for checking the accounts of corporate clients to satisfy themselves 
that the business transactions reflected by financial statements actually 
occurred. They decide how much checking should be done, and which 
areas of corporate activity, if any, should be scrutinized most 
carefully. 

Independent auditors have extensive influence over the financial 
results of corporate operations reported to investors, creditors, gov- 
ernmental authorities, and the public. The "Big Eight" accounting 
firms exercise their extensive influence as independent auditors for the 
Nation's largest corporations. The financial data used by the Con- 
gressional Research Service in its analysis results from accounting 
and auditing decisions made by corporate managements with the 
agreement of their "Big Eight" firm auditors. 

The integral role of the "Big Eight" firms in determining the 
amount of sales, net income, income taxes, and assets reported by 
their corporate clients listed on the New York Stock Exchange and 
the American Stock Exchange must be remembered when evaluating 
the findings of the Congressional Research Service. Financial data 
of the "Big Eight" firms' corporate clients clearly shows that they 
have enormous impact on the Nation's economy. The "Big Eight" 
firms heavily influence the financial data reported by their corporate 
clients. 

CRS FINDINGS 

The Congressional Research Service found that there are a total of 
2,641 corporations listed on the New York Stock Exchange and the 
American Stock Exchange. The "Big Eight" firms claim *2,248 or 85 
percent of the total number of corporations listed on those exchanges 
as clients. The corporate clients of the "Big l^i^lit^ firms control most 
of the Nation's business wealth. 



39 

Using- average annual data for the years 1974 and 1975. the Congres- 
sional Research Service compared data of the "Big Eight" firms' 
clients that are listed on the two major exchanges with data reported 
by the Department of Labor and the Department of Commerce. Ap- 
proximately one-third of the Nation's 62.5 million employees in non- 
agricultural and nongovernmental establishments are employed by 
the corporate clients of the "Big Eight" accounting firms. Those same 
clients accounted for one half of the $2,552 billion in sales for the 
manufacturing, trade, and retail sectors. About 84 percent of the $75.4 
billion of corporate profits after taxes was earned by the "Big Eight" 
firms' clients. 

The Congressional Research Service analyzed the impact of the "Big 
Eight" firms' clients listed on each of the two major exchanges. The 
Xew York Stock Exchange reported that the securities of 1.543 corpo- 
rations were listed on its exchange in 1974. Of those corporations. 1.417 
or 92 percent * are clients of "Big Eight" accounting firms. 

The "Big Eight" firms have 831 clients listed on the American Stock 
Exchange. That amounts to 76 percent * of the 1,098 corporations listed 
on that exchange in 1974. Thus, the dominance of the "Big Eight'" 
accounting firms is much more pronounced on the Xew York Stock 
Exchange where the Nation's "blue-chip stock" corporations are regis- 
tered. On both major exchanges, the "Big Eight" firms control the 
independent auditing for the bulk of the registered corporations. 

For all the corporations listed on the Xew York Stock Exchange, 
the following percentages show what proportion of the respective data 
categories is associated with clients of the "Big Eight" firm- : 

94 percent of all sales (revenues) received, 

94 percent of all profits earned, 

90 percent of all income taxes paid, 

94 percent of all people employed, 

94 percent of all assets owned. 
For all the corporations listed on the American Stock Exchange, the 
following percentages show what proportion of the respective data 
categories is associated with clients of the "Big Eight" firms: 

67 percent of all sales (revenues) received. 
67 percent of all profits earned, 
66 percent of all income taxes paid, 
61 percent of all people employed, 
73 percent of all assets owned. 

With regard to the "income taxes paid" category, the Congressional 
Research Service notes that the data reflects income taxes paid to all 
government authorities, not just the Federal Government. Studies 
performed by this subcommittee show that many large corporate 
clients of "Big Eight" firms pay minimal or no Federal income taxes. 

The Congressional Research Service also measured the dominance of 
the "Big Eight" firms as independent auditors for the Nation's 50 
largest corporations, ranked in each of five categories — sales, income, 
taxes, employees, and assets. The analysis shows that all of the 50 

* These percentage figures are based on the number of clients reported by the "Big 
Eight" firms and the total number of registered corporations reported by the exehang 
Using the number of clients reported by the "Riir Eight" firms and the total number of 
corporations on the exchanges for which data was received or not found, the Congressional 
Research Service computed percentage figures that are marginally smaller due to the use 
of its different methodology. (See Appendix B, pages 419 and 420.) 



40 

largest corporations in all of the categories are audited by one of the 
"Big Eight" accounting firms. Thus, the "Big Eight" firms have com- 
plete control over the independent auditing of the Nation's 50 largest 
corporations in each category measured. 

In its report, the Congressional Research Service evaluated the 
relative positions of the individual "Big Eight" accounting firms. 
All of them are large organizations with extensive influence, but some 
are more influential than others. The individual influence of the "Big 
Eight" firms relates to the identity and size of their corporate clients. 

The "Big Eight" firms divide into three basic groups according to 
the number and economic power of corporations that are clients of the 
individual "Big Eight" firms. Price Waterhouse & Co. is in a class of 
its own as the most influential of the "Big Eight" firms. The second 
most influential group includes Arthur Andersen & Co., Coopers & 
Lybrand, Haskins & Sells, and Peat, Marwick, Mitchell & Co. The 
third group is comprised of Ernst & Ernst, Arthur Young & Co., and 
Touche Ross & Co. 

For all of the data categories measured, the three groups of "Big 
Eight" firms demonstrate the relative influence exercised by indi- 
vidual firms. The "Big Eight" firms exercising the most influence have 
a greater number of major corporate clients, and their clients possess 
greater economic power. 

The following tables are based on data contained in the Library of 
Congress report. They show the relative influence of individual "Big 
Eight" firms in terms of the economic power exercised by their corpo- 
rate clients listed on each of the two major stock exchanges. The "Big 
Eight" firms are separated according to their three basic influence 
groups. 

The percentages shown in the tables relate the clients of each "Big 
Eight" firm to all of the corporations listed on the designated stock 
exchange in each data category. 

PERCENTAGE OF SALES OF ALL CORPORATIONS LISTED ON THE EXCHANGES FOR WHICH A "BIG EIGHT" 

FIRM ACTS AS INDEPENDENT AUDITOR 

New York American 

Stock Stock 

Exchange Exchange 

Price Waterhouse & Co... 23.8 15.7 

Arthur Andersen & Co 

Coopers & Lybrand 

Haskins & Sells _ 

Peat, Marwick, Mitchell & Co . 

Arthur Young & Co 

Ernst & Ernst . 

Touche Ross & Co .-. 

Total .- -.-. 93.7 66.9 



14.6 


8.6 


11.7 


6.3 


12.5 


5.5 


11.5 


8.4 


6.9 


8.2 


6.9 


8.8 


5.8 


5.4 







41 

PERCENTAGE OF NET INCOME OF ALL CORPORATIONS LISTED ON THE EXCHANGES FOR WHICH A "BIG EIGHT" FIRM 

ACTS AS INDEPENDENT AUDITOR 



New York American 

Stock Stock 

Exchange Exchange 



Price Waterhouse Co 28. 1 19.3 

Arthur Andersen & Co 

Coopers & Ly brand 

Haskins & Sells 

Peat, Marwick, Mitchell & Co... 

Arthur Young & Co 

Ernst & Ernst 

Touche Ross & Co 

Total 94.1 66.7 

PERCENTAGE OF INCOME TAXES OF ALL COMPANIES LISTED ON THE EXCHANGES FOR WHICH A "BIG EIGHT" FIRM 

ACTS AS INDEPENDENT AUDITOR 



15.6 


11.2 


13.4 


5.7 


12.7 


7.0 


9.6 


5.5 


5.8 


7.8 


6.3 


5.4 


2.6 


4.8 







New York 


American 


Stock 


Stock 


Exchange 


Exchange 



13.1 


10.4 


10.1 


7.9 


8.7 


5.0 


7.0 


5.6 


8.2 


6.8 


4.8 


6.6 


2.0 


4.4 







Price Waterhouse & Co 36.0 19.1 

Arthur Andersen & Co . 

Coopers & Ly brand 

Haskins & Sells 

Peat, Marwick, Mitchell & Co 

Arthur Young & Co 

Ernst & Ernst 

Touche Ross & Co 

Total 89.9 65.8 

PERCENTAGE OF EMPLOYEES OF ALL CORPORATIONS LISTED ON THE EXCHANGES FOR WHICH A "BIG EIGHT'TIRM 

ACTS AS INDEPENDENT AUDITOR 

New York American 

Stock Stock 

Exchange Exchange 

Price Waterhouse & Co 19.6 13.5 

Arthur Andersen & Co 

Coopers & Lybrand 

Haskins & Sells 

Peat, Marwick, Mitchell & Co 

Arthur Young & Co 

Ernst & Ernst 

Touche Ross & Co 

Total.. 94.1 



14.8 


9.3 


10.0 


4.4 


14.8 


5.4 


14.0 


6.6 


5.5 


9.4 


7.2 


8.3 


8.1 


4.3 



13.9 


12.5 


13.1 


6.8 


13.8 


8.5 


16.6 


10.1 


4.6 


9.5 


7.7 


6.6 


3.7 


5.0 



42 

PERCENTAGE OF TOTAL ASSETS OF CORPORATIONS LISTED ON THE EXCHANGES FOR WHIC H A 'BIG EIGHT" FIRM 

ACTS AS INDEPENDENT AUDITOR 

New York American 

Stock Stock 

Exchange Exchange 

Price Waterhouse & Co 20. 3 13. 8 

Arthur Andersen & Co 

Coopers & Ly brand 

Haskins & Sal Is 

Peat, Marwick, Mitchell & Co 

Arthur Young & Co 

Ernst & Ernst. 

To uche Ross & Co 

Total 93.7 72.8 

The influence of individual "Big Eight" accounting firms as shown 
in the preceding tables is truly extraordinary. Price Waterhouse & 
Co. alone audits 24 percent of the total sales and 28 percent of the 
total net earnings for all the corporations listed on the New York 
Stock Exchange. The next four most influential "Big Eight" firms — 
Arthur Andersen & Co., Coopers & Lybrand, Haskins & Sells, and 
Peat, Marwick, Mitchell & Co. — collectively are the auditors for 50 
percent of the total sales and 51 percent of the total net earnings for 
all of the corporations listed on the New York Stock Exchange. 

Thus, the five most influential "Big Eight" accounting firms col- 
lectively are the independent auditors for 74 percent of the total sales 
and 79 percent of the total net earnings for all the corporations listed 
on the Nation's largest exchange, the New York Stock Exchange. 
That is a phenomenal degree of concentration in the performance of 
independent auditing services for the largest corporations in the 
United States. 

The "Big Eight" position is almost as concentrated on the Ameri- 
can Stock Exchange. Again, Price Waterhouse & Co. is the most 
influential "Big Eight" firm. About 16 percent of the total sales' and 
19 percent of the total net income for corporations listed on the 
American Stock Exchange is audited by Price Waterhouse & Co. alone. 
When the four "Big Eight" firms in the second most influential group 
are combined with Price Waterhouse & Co., those five accounting firms 
act as independent auditors for 45 percent of the total sales and 49 
percent of the total net income for all the corporations listed on the 
American Stock Exchange. 

The extraordinarily high concentration of independent auditing 
influence held by the five most influential "Big Eight" accounting 
firms is spread across both major stock exchanges, but is focused 
especially on the 50 largest corporations in the United States. The 
Congressional Research Service found that Price Waterhouse & Co. 
is the independent auditor for 17 of the 50 largest corporations in the 
United States, ranked according to sales. When the 50 largest cor- 
porations are ranked according to net income. Price Waterhouse & 
Co. is the independent auditor for 16 of them. 

The next four most influential "Big Eight" firms— Arthur Ander- 
sen & Co., Coopers & Lybrand, Haskins & Sells, and Peat. Marwick, 
Mitchell & Co. — collectively are the independent auditors for 25 of 



43 

the 50 largest corporations ranked by sales, and 28 of the 50 largest 
corporations ranked according to net income. Combining their clients 
with those of Price Waterhouse & Co. shows that the five most in- 
fluential "Big Eight" firms audit 42 of the 50 largest corporations in 
the United States, ranked according to sales. When ranked by net 
income, 44 of the 50 largest corporations are audited by those five 
"Rig Eight"' firms. 

The Library of Congress report prepared for this subcommittee 
also analyzed the concentration of "Big Eight"' firms as independent 
auditors for the ten largest corporations in each of six selected in- 
dustries. Those industries are natural resources, banks and bank hold- 
ing companies, chemicals, drugs and pharmaceuticals, general 
machinery and equipment, and electric power companies and holding 
companies. The results of the analysis generally show that two or 
three "Big Eight" firms are the independent auditors for most of the 
ten largest corporations in a particular industry. 

Price Waterhouse & Co. is strongly entrenched as the independent 
auditor for certain of the top ten corporations in all six industries 
selected. However. Price Waterhouse & Co. has especially strong 
influence over the accounting methods used bv the natural resource 
industry because the firm is independent auditor for six of the ten 
largest corporations in that group. All of the top ten natural resource 
corporations are major oil and gas companies, and the accounting 
methods used by such corporations have been the subject of much 
controversy. 

EFFECTS OF CONCENTRATION 

There are many disturbing aspects to the extremely high concen- 
tration of major corporate clients audited by the "Big Eight" ac- 
counting firms. The most important problem is the anti-competitive 
effect of such concentration on the supply of independent auditing 
services to the largest corporations in the United States. Because of 
the special role of independent auditors in the economy, the concen- 
tration of auditing influence among the "Big Eight"' firms presents 
some unique problems, in addition to the traditional problems associ- 
ated with anti-competitive practices. 

Traditionally, lack of competition creates problems concerning the 
price of goods and services, their quality, the terms upon which they 
are offered, and the development of improved goods and services that 
reduce the value of existing goods and services. The traditional prob- 
lems associated with lack of competition and excessive market con- 
centration may be evident in the supply of auditing, accounting, and 
other services by the "Big Eight" firms to major corporations. The 
extremely high concentration of major corporate clients among the 
"Big Eight" firms — and especially among the five most influential 
"Big Eight" firms — certainly presents a situation calling for further 
investigation into the anti-competitive effects which may reasonably 
be expected to result from such concentration. 

Moreover, the special role of the "Big Eight'" firms as independent 
auditors would aggravate the anti-competitive situation which can 
result from excessive market concentration. For example, performance 
of management advisory services for a corporate client is a natural 
"tie-in" to the performance of independent auditing services for the 



67-159 0-77-5 



44 

same client, since the client's management can reasonably expect the 
independent auditor to favorably audit the results of its own work. 
Regular business consulting firms cannot implicitly offer the expecta- 
tion that their services will be approved by a client's independent 
auditor. 

Another unique problem resulting from the special role of inde- 
pendent auditors is the broad scope of their practice. As previously 
noted, the "Big Eight" firms as independent auditors have extensive 
influence over the financial results reported to the public by corporate 
clients. To a degree unparalleled by other groups in the private 
sector, the primary business of the "Big Eight" firms is to be intimately 
involved in the presentation of corporate financial results. 

The success or failure of financial results reported to the public 
usually determines the future acceptance of management by a cor- 
poration's shareholders and creditors. The extensive influence main- 
tained by a "Big Eight" accounting firm over the financial success of 
a corporate client in one particular industry may also exist for one 
or more other corporate clients in the same industry. As documented in 
the Library of Congress report, Price Waterhouse & Co. is the inde- 
pendent auditor for several major corporate competitors in the six 
industries surveyed. Other "Big Eight" firms also act as independent 
auditors for more than one of the major corporate competitors in a 
single industry. 

The "Big Eight" firms not only concentrate their influence among 
major competitors in a single industry, but spread their concentrated 
influence through other major industries. Independent auditing is one 
service required by all major corporate competitors in all industries. 
The spread of "Big Eight" firm concentration through major in- 
dustries is one of the primary factors contributing to the vast size 
and influence of the "Big Eight" firms. 

Price Waterhouse & Co., as noted previously, exercises concentrated 
influence in the natural resources industry by acting as the independent 
auditor for six of the ten largest corporate competitors in that indus- 
try. Simultaneously, Price Waterhouse & Co. exercises the same type 
of concentrated influence in the general machinery and equipment 
industry, as the independent auditor for four of the top ten competing 
corporations. Similar influence is exercised concurrently in other in- 
dustries by Price Waterhouse & Co. and other "Big Eight" accounting 
firms. 

The "Big Eight" firms also have a forum for privately meeting 
together and discussing subjects of mutual interest through their 
membership in the AICPA. which they control. At the suggestion of 
some big accounting firms, the AICPA established five advisory com- 
mittees representing different segments of the AICPA's membership 
to promote their respective interests within the AICPA. (See page S3 
for a description of the AICPA's advisory committee svstem.) 

One of the five AICPA advisory committees is assigned to represent 
the interests of the Nation's 15 largest accounting firms. That advisory 
committee has 11 members, eip-ht of whom permanentlv represent the 
interests of the individual "Big Eight" accounting firms. At their 
periodic meetings, the members have discussed such topics as the need 
for a political action committee to influence members of Congress. 



45 

Their AICPA advisory committee is one organized forum where 
the "Big Eight" firms have the opportunity to meet privately and pro- 
mote anti-competitive activities. The AICPA provides other forums 
where some or all of the "Big Eight" firms could promote anti-compet- 
itive activities. The AICPA has many committees that meet to formu- 
late AICPA policies and programs in specific areas of interest to 
CPAs. As described subsequently in this study, all of the AICPA 
committees dealing with important matters of interest are dominated 
by representatives of the "Big Eight" firms. 

Any of those committees could act as a vehicle for promoting anti- 
competitive activities in a specific area of interest. Examples of AICPA 
actions which could be construed as promoting anti-competitive prac- 
tices include the dissolution of the AICPA ? s committee to aid displaced 
CPA firms, and adoption of a plan sponsored by the "Big Eight" to 
have large accounting firms voluntarily inspect one another to assure 
quality of practice. Both actions were criticized by small CPA firms, 
and both are described subsequently in this study. ( See pages 101 and 
114.) 

A further disturbing aspect of the extraordinary influence concen- 
trated among the "Big Eight" firms is that it appears to be increas- 
ing. As a byproduct of the corporate merger movement that has 
concentrated control over the Nation's economic resources among fewer 
and fewer institutions and individuals, small and medium-sized CPA 
firms have been displaced as independent auditors by the "Big Eight" 
and other large accounting firms. When smaller companies are merged 
into larger corporations, which generally have a "Big Eight" firm as 
independent auditor, the CPA firms that formerly audited the small 
companies usually lose their clients to the u Bi<? Eight" firms. 

Displacement of small CPA firms by "Big Eight" firms also occurs 
when companies "go public" by selling their shares to the public. Un- 
derwriters and bankers often inform companies that a nationally 
known firm must be retained as independent auditor in order to sell 
securities to the public at the highest possible price, or obtain a nec- 
essary loan. An article in the June, 1971 issue of the Journal of 
Accountancy, entitled "Displacement of Auditors When Clients Go 
Public," described the displacement of small CPA firms by larger 
firms. (See xVppendix K, page 1743.) 

Concentration of auditing influence among the "Big Eight" ac- 
counting firms has occurred through direct mergers of small CPA 
firms into the large national firms, as well. Sometimes the small CPA 
firms have no choice but to merge with large national firms that have 
taken major clients from the small CPA firms. A few of the "Big 
Eight" firms have achieved significant growth through a program of 
mergers with smaller firms. 

This subcommittee has received complaints about anti-competitive 
practices by "Big Eight" firms from the accounting profession and the 
business sector. Most of the complaints have come from CPAs asso- 
ciated with small and medium-sized CPA firms. They have encouraged 
the subcommittee and the Federal Government to correct the anti- 
competitive situation which they believe exists. Examples of the type 
of complaints expressed by smaller accounting firms are included in 
Appendix K. 



46 

One of the complaints about anti-competitive practices by "Big 
Eight" firms was from Kenneth Leventhal & Co., which claims 
that it is the 25th largest accounting firm in the Nation. Kenneth Lev- 
enthal & Co. offered to provide material support for its charge, but a 
subcommittee request for such materials has failed to elicit any re- 
sponse. (See Appendix K, page 1731.) 

The information which this subcommittee has received from the 
"Big Eight" firms and other sources clearly shows an excessively high 
concentration of auditing influence among the "Big Eight" firms. The 
degree of concentration in providing independent auditing services to 
major corporations is so great that it constitutes evidence of a serious 
lack of competition. The "Big Eight" firms control the performance of 
vitally important independent auditing services for the bulk of the 
economic power held by the corporations on the New York Stock Ex- 
change and the American Stock Exchange. 

This study notes the adverse effects of excessive concentration in the 
performance of independent auditing services. More research is needed 
to document fully the extent of the anti-competitive situation repre- 
sented by the excessive concentration of influence among the "Big 
Eight" accounting firms. Enough is presently known to justify imme- 
diate action by Congress and Federal agencies to restore competitive 
balance in the performance of independent auditing services for major 
corporations. Because independent auditors serve a special purpose in 
the Nation's economy, factors other than restoring competition must 
also be considered to assure that independent auditing services are 
performed properly. 

Profitability of the "Big Eight" Accounting Firms 

A successful accounting practice is a very lucrative enterprise. The 
"Big Eight" firms have augmented traditionally profitable accounting 
services with an array of profitable management advisory services that 
do not involve accounting expertise. 

Because CPAs generally practice accounting as business partner- 
ships which do not report to the public, there is little data available 
to the public on the profitability of accounting firms. However, some 
data is available within the accounting profession. This subcommittee 
has reviewed certain data on the profitability of accounting firms, and 
its conclusions have been confirmed by practicing CPAs, as well as 
unsolicited data received by the subcommittee. 

Accounting firms are service organizations which do not require 
substantial tangible assets or capital expenditures to operate. Office 
expenses and staff salaries are the major deductions in computing 
the net profit available for the partners in an accounting firm after 
operating expenses have been deducted from their total revenues. As a 
result, profit margins are usually quite high. 

A CPA practicing on his own in a sole proprietorship can net 
better than 50 percent of his total revenues as profit for himself. The 
average partnership of CPAs can earn more than 40 percent of its 
total revenues as net profit. Even though the net profit margin is typi- 
cally lower for a partnership than for a single practitioner, individual 
partners tend to earn more money than single practitioners because 
partnerships have proportionately greater revenues. 



47 

The proportion of overhead expenses rises as the size of a partner- 
ship increases, but the ability to provide services also increases. The 
increased ability to provide services means that a larger partnership 
can serve more clients and bigger individual clients. The resulting in- 
crease in total revenues more than compensates for the higher propor- 
tion of overhead expenses, and generally enables individual partners 
in larger partnerships to earn more money. 

Arthur Andersen & Co. has voluntarily reported that it had total 
revenues of $386,341,000 and net earnings of $90,818,000 for its fiscal 
year ending 31 August, 1975. The firm's net profit margin was 23.5 
percent. Arthur Andersen & Co.'s 1975 financial statements are in- 
cluded in Appendix A at page 200 as an example of the types 
of expenses involved in operating one of the "Big Eight" accounting 
firms. 

The net profit margins of "Big Eight" firms are lower than those of 
smaller accounting firms because of the substantial overhead expenses 
involved with operating such large organizations. Partners of "Big 
Eight" firms are compensated for increased overhead expenses by the 
tremendous volume of revenues their firms are able to generate. 

The subcommittee staff estimates that all of the "Big Eight" ac- 
counting firms have net profit margins in the range of 25 percent. 
Based on the staff's estimate that the "Big Eight" firms have total an- 
nual revenues of over $2 billion, their total net earnings are more than 
$500 million each year. That is a substantial sum of money to be appor- 
tioned among the few thousand individuals who are the partners of 
the Nation's eight largest accounting firms. Arthur Andersen & Co. 
reported that the average earnings for each of the firm's active part- 
ners at the end of its 1975 fiscal year was $95,152. The financial rewards 
of partnership in a "Big Eight" firm are obviously quite attractive 
under their existing system of accounting practice. 

The top partners of the "Big Eight" accounting firms are the policy- 
makers who decide which direction the firms shall take in providing 
services to clients. As noted previously, the "Big Eight" firms have 
substantial direct and indirect impact on Federal accounting practices, 
as well as other policies and programs of the Federal Government. 
Therefore, it is important to know the financial interests of those 
individuals. 

In order to evaluate the financial interests of the top partners in the 
"Big Eight" firms, this subcommittee requested the total annual com- 
pensation earned by each of the three highest-paid individuals in each 
of the "Big Eight"' firms. 

Only Arthur Andersen & Co. and Price Waterhouse & Co. cooper- 
ated with the subcommittee by providing the requested information. 
Most of the remaining "Big Eight" firms said that data on compensa- 
tion was not relevant to the subcommittee's study, and that revealing 
such data would amount to an invasion of privacy. 

Several firms expressed concern that the subcommittee would not 
understand the compensation of top partners because their compensa- 
tion is not truly comparable with the compensation earned by corpo- 
rate executives. The responses from all of the "Big Eight" firms are 
included in Appendix D beginning on page 847. 

The open responses of Arthur Andersen & Co. and Price Water- 
house & Co. show that the concerns of the other "Bi<z Eight" firms are 



48 

unwarranted. The compensation of top partners reported by Arthur 
Andersen & Co. and Price Waterhouse & Co. are certainly substantial, 
but are not greatly out of line with the salaries of top executives of 
major corporations which are clients of these mult imill ion dollar ac- 
counting firms. Arthur Andersen & Co.'s response also provides a 
detailed description of the manner in which the firm's top partners are 
compensated, and how their compensation differs from compensation 
of corporate executives. 

The annual compensation of each of the three highest-paid partners 
at Arthur Andersen & Co. is $429,843, $388,716, and $349,609. Price 
Waterhouse & Co. states that its three highest-paid partners earn 
respectively $316,134, $297,920, and $281,275. The compensation fig- 
ures reported by the two firms may have been computed by different 
methods, and thus may not be completely comparable. 

Sources within the accounting profession have told the subcommit- 
tee staff that top partners at other "Big Eight" firms earn more 
than the amounts reported by Arthur Andersen & Co. and Price 
Waterhouse & Co. The subcommittee is unable to substantiate or dis- 
miss such reports because six of the "Big Eight" firms refused to pro- 
vide factual information. 

The reasonability of compensation earned by top partners of "Big 
Eight" firms is not the concern of this subcommittee. The information 
reported on compensation of top partners is relevant to this study 
because it clearly indicates that, by any definition, the policymaking 
partners at "Big Eight" firms have a very substantial financial inter- 
est in preserving the existing style and scope of practice which they 
now enjoy. Substantive changes in accounting standards or the type 
of services which may be offered by "Big Eight" firms could signif- 
icantly affect the earnings of partners in those firms. 

Partners in "Big Eight" firms have substantial financial interests 
at stake in preserving the statics quo regarding the structure of the ac- 
counting profession, the standards CPAs must follow, and the broad 
scope of accounting and non-accounting services which are offered by 
large accounting firms. The substantial financial interests of the "Big 
Eight" firms indicate that those firms have a strong vested interest in 
avoiding changes in the present system which might reduce the fin- 
ancial value of their services to clients. Correction of improper, but 
profitable, practices by accounting firms through internal self-reform 
appears unlikely in view of the financial interests held by the "Big 
Eight" firms, which dominate the accounting profession. 

Independence of the "Big Eight" Accounting Firms 

The "Big Eight" accounting firms primarily affect the Federal 
Government and its programs through their role as the independent 
auditors for the vast majority of the Nation's largest corporations. 
Eighty-five percent of the corporations listed on either the New York 
Stock Exchange or the American Stock Exchange employ a "Big 
Eight" firm to act as their independent auditor. The "Big Eight" 
firms have great influence over the reported operating results of 
major corporations because the firms dominate both the development 
and application of auditing and accounting standards used by their 
clients. 

Enactment of the. Federal securities laws created a special role in 
society for CPAs who act as independent auditors. Because the Fed- 



49 

eral securities laws were specifically enacted to protect the interests of 
investors and other third parties, independent auditors owe their 
primary allegiance to the persons who rely on financial statements, 
lather than the corporations that issue financial statements. The in- 
dependent auditing provisions of the Federal securities laws are the 
key to their effectiveness because disclosure of material information 
is the basis for protecting the public from poorly managed corpora- 
tions. To be useful in protecting the public, however, information dis- 
closed on corporate activities must be accurate. 

A three-party relationship exists for CPAs who serve as inde- 
pendent auditors of publicly-owned corporations. The three parties 
in interest arc the CPA. the client corporation, and the public. Al- 
though the independent auditor is retained and paid by the corpo- 
rate client, the Federal securities laws clearly require that the services 
of the independent auditor be performed for the benefit of the public. 
Corporate managements may also benefit from the application of 
auditing and accounting services designed to produce accurate infor- 
mation on the results of corporate activities, but the Federal securi- 
ties laws were not enacted for their protection. 

Members of the public expect that an independent auditor will pro- 
tect their interests and will not promote his clients interest at their 
expense. It is improper for independent auditors to act as advocates 
on behalf of their clients' interests. 

The major responsibility of independent auditors is to perform their 
services while maintaining strict independence from their clients, both 
in fact and in appearance. Public confidence in the accuracy and use- 
fulness of corporate financial information depends upon a firm belief 
that such information has been checked and certified by qualified audi- 
tors who are truly independent. Confidence in the independence of 
auditors requires that they have no direct or indirect interests in the 
affairs of their clients. 

In administering the Federal securities laws, the Securities and 
Exchange Commission (SEC) has defined the qualifications of ac- 
countants who may act as independent auditors. (See Appendix I, 
p. 1431.) The SEC "will not recognize any certified public accountant 
or public accountant as independent who is not in fact independent." 
The SEC further requires : 

In determining whether an accountant may in fact be not in- 
dependent with respect to a particular person, the Commission 
will give appropriate consideration to all relevant circumstance-, 
including evidence bearing on all relationships between the ac- 
countant and that j^erson or any affiliate thereof, and will not 
confine itself to the relationships existing in connection with the 
filing of reports with the Commission. 
Thus, the requirements are clear that a CPA acting as an independ- 
ent auditor of a publicly-owned corporation must be independent in 
fact with regard to his total relationship with that corporate client. 
The standards of conduct followed by independent auditors must pre- 
serve their independence. Activities of CPAs which promote the 
interests of corporate clients erode public confidence regarding the 
independence of auditors. 

By mandating the practice of independent auditing. Congress 
created a special position for CPAs that is unmatched by any other 
profession or business in the private sector. Independent auditors are 
different from other participants in the Nations economy for the very 



50 

reason that they are endowed with the reputation for objectivity and 
impartiality associated with the concept of independence. They alone 
are regarded as the disinterested umpires who assure that self-inter- 
ested businessmen accurately report the results of their activities, as 
required by the Federal securities laws. 

Enactment of the Federal securities laws imparted special stature to 
the accounting profession, while guaranteeing CPAs a consistent 
demand for their services as independent auditors. The "Big Eight" 
and other large accounting firms readily accepted the special stature 
associated with their designated role as independent auditors, but they 
have not fully accepted the special responsibilities which accompany 
the position of independent auditor. In fact, they have used their des- 
ignated reputation for independence to market a variety of non- 
accounting services. 

This subcommittee has collected an abundance of materials demon- 
strating activities of "Big Eight" accounting firms which impair their 
ability to act as independent auditors for the vast majority of the 
Nation's large corporations. Many examples have been selected from 
those materials, and are included in this study to illustrate the type 
of activities undertaken by "Big Eight" firms which contradict their 
claim to act independently in the public interest. The "Big Eight" 
accounting firms are in fact not independent (See p. 54.) 

The lack of independence of "Big Eight" firms results from the 
scope of client services they perform for profit and the activities they 
undertake on their own. This section summarizes the types of "Big 
Eight" activities which conflict with their role as independent audi- 
tors. The subsequent sections describing each of the "Big Eight" firms 
individually include specific examples of the activities summarized 
in this section. 

MANAGEMENT ADVISORY SERVICES 

Performance of management advisory services is the primary prob- 
lem area regarding the services offered by "Big Eight" firms for profit. 
The performance of management advisory services necessarily in- 
volves the "Big Eight" firms in the business operations of their corpo- 
rate clients. Their involvement in the business operations of their 
clients conflicts with the "Big Eight" firms' obligation to be inde- 
pendent in fact from their clients. The "Big Eight" firms cannot act 
effectively as independent auditors when they have financial and 
professional interests in the business operations of their clients. 

The management advisory services described at page 34 are ex- 
amples of the conflicting interests which arise when an independent 
auditor becomes involved in the business of a client. Seven of 
the "Big Eight" firms provide executive recruitment services for their 
clients. Those firms are involved in placing influential executives who 
have a bearing on the business operations of their clients. As such, 
those seven firms have a direct financial and professional interest in 
assuring that the executives recruited through their efforts are suc- 
cessful in helping the business operations of their clients.* 

* This subcommittee has received a detailed description of the manner in which the 
performance of management advisory services, especially executive recruitment, by ac- 
counting firms directly conflicts with their responsibility to be independent in fact and 
appearance from the interests of corporate clients. The description is included as part of 
a letter from the president of a professional personnel agency which must compete against 
the undue advantage of independent auditors who also provide executive recruitment 
services. (See Appendix K, page 1736. 



51 

If executives recruited by "Big Eight" firms are not successful, then 
the financial value of the firms' executive recruitment services to client? 
is impaired, and may result in a loss of revenues for "Big Eight" firms. 
Failure in performing management advisory services also impairs the 
overall professional reputation of "Big Eight" firms. The value of all 
services performed by "Big Eight" firms is enhanced by the repu- 
tation for accuracy which is associated with the concept of independent 
auditor. Failure in providing any area of services may damage the pro- 
fessional reputation for competence needed by "Big Eight" firms to 
act effectively as independent auditors. 

Even if the "Big Eight" firms are successful in providing manage- 
ment advisory services, questions may be raised concerning the pro- 
cedures and standards used to audit a client which employs executives 
recruited by its independent auditor. There may be reasonable doubts 
as to the thoroughness of the independent audit or the suitability of the 
accounting standards used in preparing the client's financial state- 
ments. Such doubts arise because the independent auditor has a direct 
financial and professional interest in having the client appear success- 
ful in its reports to the public. 

The public may reasonably doubt the ability of a "Big Eight" firm 
to act as independent auditor for a corporate client where one or more 
of the client's influential executives have been recruited by the "Big 
Eight" auditor. Similarly, corporate shareholders and others may 
wonder if a "Big Eight" firm is being retained as a corporation's inde- 
pendent auditor primarily because of the relationship existing between 
the "Big Eight" firm and the influential executives it recruited. 
Reasonable doubts are necessarily raised when an independent auditor 
becomes involved in the business operations of a client. 

The conflicts of interest which arise when an independent auditor 
recruits executives for its clients also arise in regard to the perform- 
ance of other management advisory services by independent auditors. 
For example, a "Big Eight" firm that performs a marketing study 
which causes a client to market a new product has a direct financial 
and professional interest in the success of that product. Because of its 
self-interest in having that segment of the client's business succeed, 
the "Big Eight" firm cannot act independently as the auditor for such 
a client. The same problems occur when a "Big Eight" firm performs 
plant layout, product analysis, and similar services for its clients. 

The performance of actuarial services by "Big Eiffht" accounting 
firms presents an even greater conflict of interest. Contributions In- 
corporations to employee pension plans generally have a direct and 
substantial impact on corporate earnings. When an accounting firm 
provides actuarial services relating to such plans for a corporate client, 
the firm is directly involved in working with the client's management 
on matters which may substantially affect the client's earnings. An 
accounting firm cannot properly act as the independent auditor for 
such a client. 

Financial management services also involve conflicts of interest 
when performed bv "Bi<r Eight" accounting firms for their client-. 
Not only do the "Big Eicfht" firms become involved in management 
information systems that influence the direction of a client's busi- 
ness; they may be put in the position of auditing the reliability and 
accuracy of their work. The "Big Eight" firms cannot be independent 



52 

in fact from clients that are using their financial management 
services. 

TAX SERVICES 

Management advisory services are only one of the activities con- 
tributing to the loss of independence by the "Big Eight'' accounting 
firms. Tax services are another area where the "Big Eight"' firms 
have impaired their ability to act as independent auditors. 

The firms actively engage in advocacy of clients' positions regard- 
ing taxation of corporations. Their views on tax issues parallel the 
views expressed by the managements of their corporate clients and 
business lobbying groups. They support increased investment tax 
credits, more liberalized depreciation methods, continuation of tax 
credits rather than deductions for taxes paid to foreign governments, 
and other procedures designed to increase the amount of cash held 
by big corporations. 

The "Big Eight" accounting firms have not recognized the distinc- 
tion between an independent auditor's proper concern with the effi- 
cient application of existing tax laws and partisan advocacy to change 
the substance of tax laws. Advocacy of controversial positions on 
political issues involving the fair distribution of taxes results in a 
loss of independence because the auditor's interests become associated 
with the interests of his clients or some other special interest group. 
Public confidence in the impartiality and objectivity of independent 
auditors is seriously eroded when the "Big Eight" firms openly pro- 
mote the tax views of their corporate clients. 

Many segments of the public to whom independent auditors are 
responsible may not agree with the political views promoted by the 
"Big Eight" firms on behalf of the managements of their corporate 
clients. Xevertheless, "Big Eight" firms appear before Congress, State 
legislatures, and Federal and State agencies to testify as to how cor- 
porations should be taxed to correct alleged unfair tax burdens on 
businesses. Political activity by "Big Eight" firms on controversial 
tax issues is one example of the manner in which auditors lose inde- 
pendence through deliberate identification with the narrow self- 
interests of corporate clients. 

REPRESENTATION OF CLIENTS' INTERESTS 

The "Big Eight" accounting firms readily identify with the self- 
interests of corporate managements on many controversial issues in 
addition to the fairness of corporate taxation. They testify before 
State regulatory commissions on the amount of profits which should 
be earned by regulated utilities, and in support of automatic cost 
adjustment clauses which circumvent the regulatory process. "Big 
Eight" firms support inclusion of construction work in progress in 
regulated utility rate bases, as well as charging utility customers 
for Federal income taxes that are never paid to the Federal 
Government. 

They testify before Congress in support of higher oil and natural 
gas prices, and for faster write-offs of production costs. "Biir Eight" 
firms write to Federal agencies to urge adoption of rules that would 



53 

have the Federal Government pay private contractors for "costs" 
that are not normally accepted costs at all. They oppose more stringent 
Federal regulations on reporting by corporations, and recommend 
that the Federal Government not adopt uniform accounting 
methods. 

All of these are examples of the biased positions taken by "Big 
Eight" accounting firms which are incompatible with their role as 
independent auditors. Sometimes they promote a partisan view on 
a controversial issue as a "public service" on their own initiative. At 
other times they make a presentation on behalf of a client for a fee. 

Independent auditors are endowed with a public reputation for 
impartiality and objectivity because of the special role assigned to 
them by Congress in the Federal securities laws. Their statements 
and recommendations are accorded great respect and credibility 
because of the general belief that such statements and recommen- 
dations are made independently. 

When the management of a regulated utility or a recognized utility 
consultant testifies that utility profits are insufficient, the self-interest 
of those testifying is clearly evident, and their testimony is accepted 
accordingly. However, testimony by an independent auditor that 
certain policies result in insufficient utility profits often seems more 
credible because of the reputation for impartiality and objectivity 
associated with independent auditors. The "Big Eight" accounting 
firms have recognized the market value of their reputations as inde- 
pendent auditors. They use their special position to promote the 
vested interests of corporate clients for a profit. 

Another example where the "Big Eight" firms lose independence 
by identifying themselves with partisan business interests is their 
association with recognized business lobbies. Partners of "Big Eight" 
accounting firms testifv before Congress and State authorities as 
leaders of the Chamber of Commerce. The reputations of the firms 
and the mantle of the Chamber thus are bestowed upon the interests 
of the firm's large corporate clients. 

(Specific examples of activities causing loss of independence are 
described in relation to individual firms beginning on page 54. Ref- 
erence should also be made to partisan political activities of the 
AICPA which is controlled by the "Big Eight" firms and acts on 
their behalf. See page 101.) 

In view of the SEC requirement that CPAs must be independent 
in fact in regard to all relationships with clients, questions arise as 
to how the "Big Eight" firms have been permitted to pursue their 
varied activities. The answers lie in the "Big Eight" firms' dominance 
over the self-regulatorv apparatus of the accounting profession, and 
the reliance of the SEC on the AICPA. The ATCPA. which is con- 
trolled by the "Big Eight" firms, develops the behavior standards 
that are generally recosrnized by the SEC and State regulatory boards. 

Under the control of the "Big Eight" accounting firms, the ATCPA 
has encouraged CPAs to perform a broad range of management 
advisory services. The ATCPA has al^o developed ethical standards 
for CPAs that apparently do not prohibit the partisan relation-hips 
of the "Big Eight" firms with their corporate clients. For its part, 
the SEC has relied upon the ATCPA to determine what standards 
of conduct are proper for CPAs. The elose relationship between the 



54 

SEC and the AICPA is described in subsequent sections of this 
study. 

The Nation's large publicly-owned corporations are ably staffed 
with their own accountants who prepare and advocate corporate 
views on accounting matters. There is no need for the "Big Eight" 
accounting firms to engage in their many controversial nonaccount- 
ing activities, other than to earn more money or ingratiate themselves 
with corporate clients. 

The traditional public image of the "Big Eight" accounting firms 
as impartial and objective experts is not founded on fact, and is mis- 
leading as to their true status. As political partisans and purveyors of 
nonaccounting services, they become loyal agents of the clients which 
employ their services. As independent auditors, the "Big Eight" firms 
are unable to perform their responsibilities in a manner which com- 
mands public confidence. 

Illustrative Questionable Activities of Individual- "Big Eight" 

Accounting Firms 

The "Big Eight" accounting firms are involved in a wide variety 
of activities which significantly affect practically all segments of the 
Nation's economy, as well as society in general. The Federal Govern- 
ment and its policies and programs are especially influenced by the 
"Big Eight" firms. This section provides some examples of their 
activities by describing specific projects of individual "Big Eight" 
firms. 

This subcommittee received a large volume of materials in re- 
sponse to its request to the "Big Eight" firms for copies of their 
recent presentations before Congress, State legislatures, and Federal 
and State regulatory agencies. Additional materials from other 
sources have been collected and reviewed by the subcommittee staff. 
Eeview of all the materials received by the subcommittee has revealed 
that these firms have been involved in a substantial number of im- 
proper or questionable activities. 

The materials described in this section have been selected to illus- 
trate the different types of improper or questionable activities prac- 
ticed by "Big Eight" firms. They do not provide a comprehensive 
description of all the improper or questionable activities practiced 
by each firm. Some of the particular characteristics of individual "Big- 
Eight" firms are also illustrated by this section. 

An indication of the scope of activities practiced by individual 
firms is provided by the index to materials submitted by each firm. 
The indices submitted by some "Big Eight" firms are far more de- 
scriptive than others, but all of the indices submitted are useful as 
indicators. The volume of materials submitted was so great that only a 
small portion of it is included in this study as examples of their 
activities. 

Although the examples included in this study are not comprehen- 
sive, thev do illustrate the serious problems which exist regarding 
the activities of "Big Eight" firms. Three of the firms have been 
officially disciplined by the SEC for improper activities. Other sections 
of this study provide additional examples of questionable activities by 
organizations controlled by the "Big Eight" firms. 



55 



ARTHUR ANDERSEN & CO. 



Arthur Andersen & Co. is widely regarded as the most aggressive 
"Big Eight" firm in terms of promoting the positions adopted by the 
firm on political and accounting issues. News accounts often refer to 
it as the "maverick" within the accounting profession. Materials re- 
viewed by the subcommittee staff confirm that Arthur Andersen & Co. 
is aggressive in promoting interests of the firm and its clients. 

The response of Arthur Andersen & Co. to this subcommittee's 
information request is included in Appendix C beginning on page 571. 
It is the only major CPA firm which provides information to the 
public concerning its financial position. An important part of the 
firm's public information program is the annual report which it 
voluntarily prepares each year. Because of space limitations, Arthur 
Andersen & Co.'s 1975 annual report is not included in this study. 
However, the financial statements from its 1975 annual report are 
included in Appendix A at page 200. Complete copies of its annual 
report can be obtained directly from Arthur Andersen & Co. 

Arthur Andersen & Co. and Price Waterhouse & Co. are the only 
two "Big Eight" firms which cooperated fully in providing informa- 
tion to this subcommittee. Many of the other major accounting firms 
have criticized the public information program of Arthur Andersen 
& Co. The proportionately greater number of questionable or improper 
activities by Arthur Andersen & Co. noted in this study do not neces- 
sarily imply that the firm engages in such activities more than other 
"Big Eight" firms. Instead, it may reflect the fact that Arthur 
Andersen & Co. has been more open and forthright in providing in- 
formation on its activities to this subcommittee. 

Arthur Andersen & Co.'s annual reports are a useful source of 
information for understanding the activities of a large and influential 
accounting organization. However, limitations resulting from the ob- 
vious promotional nature of the reports, and the fact that the financial 
statements are not independently certified, must be recognized when 
using them. 

It was the first "Big Eight" firm to have its operations reviewed by 
an "independent" public review board. (See Appendix C, page 648.) 
Not surprisingly, the public review board found that Arthur Andersen 
& Co. "conscientiously and competently carried out" its responsi- 
bilities. In fact, the public review board was not independent and did 
not represent the public. Arthur Andersen & Co. selected the live 
review board members and paid each of them $20,000. 

The review board praised the firm's operations, and openly advo- 
cated Arthur Andersen & Co.'s views concerning the need for "infla- 
tion-adjusted" accounting methods, which was not relevant to evaluat- 
ing the firm's efficiency and competence. 

Arthur Andersen & Co.'s review board also recommended that the 
firm's partners should reduce their independence by becoming more 
active in politics, and by seeking employment in industry after retire- 
ment. The real usefulness of the review board's report lies not in its 
recommendations and findings, but in ably demonstrating the problems 
and conflicts of interest involved with permitting major accounting 
firms to review themselves for competence and independence. 



56 

The SEC has issued Accounting Series Release 157 condemning 
faulty auditing practices by Arthur Andersen & Co. The SEC state- 
ment also criticizes intentional efforts by Arthur Andersen & Co. to 
mislead the SEC staff. (See Appendix C, page 638.) In another case, 
Arthur Andersen & Co. failed to follow up information it was given 
that Merck & Co., one of its clients, was making questionable foreign 
payments. Arthur Andersen & Co. reportedly knew that at least one 
such payment was illegal. (See Appendix C, page 649.) 

Arthur Andersen & Co. recently filed a complaint with the SEC 
alleging that the SEC has illegally acted to require CPAs to state 
whether an accounting change by a client is preferable. The complaint 
also alleges that the SEC illegally requires CPAs to follow all past 
and future accounting standards established by the private sector's 
Financial Accounting Standards Board (FASB). Arthur Andersen 
& Co. has brought suit in Federal court to enforce its complaint 
against the SEC. 

Arthur Andersen & Co.'s description of its complaint and the firm's 
reaction to criticism of its complaint are included in Appendix C at 
page 650. News articles describing the complaint and criticism of 
Arthur Andersen & Co. within the accounting profession are also 
included. 

The process by which the FASB establishes accounting standards 
that are recognized by the SEC is fully described in subsequent sec- 
tions of this study. Arthur Andersen & Co. has raised valid questions 
concerning the legality of the process by which the SEC grants official 
recognition to accounting standards developed by the FASB. 

Regarding its efforts to influence Federal and State authorities, 
Arthur Andersen & Co. has provided this subcommittee with an ex- 
cellent synopsis of the many presentations made by the firm's repre- 
sentatives. (See Appendix C, page 573.) The index and synopsis 
clearly show the wide variety of questionable activities which the firm 
has undertaken. Some of those activities were performed for clients, 
some were performed as a "public service," and others were performed 
for groups such as the Chamber of Commerce. 

An example of Arthur Andersen & Co.'s "public service" efforts is 
the firm's statement before the House Ways and Means Committee, 
dated 15 July, 1975. (See Appendix C, page 624.) That statement 
openly advocates retention of controversial foreign tax benefits for 
multinational corporations. The views expressed agree with the views 
expressed by big business lobbyists, but Arthur Andersen & Co.'s 
reputation as an independent auditor lends more credibility to its 
partisan statements. 

The public review board hired by Arthur Andersen & Co. stated : 
"The firm does not, we understand, engage in lobbying efforts on be- 
half of clients. Also, the firm will not, as a matter of policy, undertake 
tax engagements which require a legislative solution." Although Ar- 
thur Andersen & Co.'s statement in strong support of controversial 
foreign tax benefits for corporations was performed as a "public 
service," existing and potential corporate clients of Arthur Andersen 
& Co. could be expected to view favorably the firm's advocacy of big 
business interests. 



57 

Another example of questionable or improper activities by Arthur 
Andersen & Co. is the statement made by one of its partners as vice 
president of the Greater Boston Chamber of Commerce. (See Appen- 
dix C, page 622.) That statement uses strong rhetoric and misleading 
factual assertions to oppose the creation of a public power authority in 
Massachusetts. Arthur Andersen & Co. is the independent auditor for 
several of the Nation's largest electric utility monopolies that are ve- 
hemently opposed to municipal or State ownership of electric power 
facilities. 

Arthur Andersen & Co. submitted many more examples of its ac- 
tivities than could be included in this study because of space limita- 
tions. However, certain other examples should at least be mentioned : 
Arthur Andersen & Co. testified on behalf of four electric util- 
ities before the Florida legislature recommending that contro- 
versial accounting methods be used to charge utility customers for 
taxes which are not paid by electric utilities. 

An Arthur Andersen & Co. partner presented a statement 
on behalf of the Greater Boston Chamber of Commerce in oppo- 
sition to electric rates designed to conserve electric energy and 
reduce costs for residential customers. The statement said that 
customers would not save much, but that 36,000 jobs would be lost. 
Arthur Andersen & Co. testified as a "public service" before the 
Nevada legislature in regard to controversial methods of setting 
utility rates. Arthur Andersen & Co. advocated use of fuel adjust- 
ment clauses, inclusion of construction work in progress in utility 
rate bases, and use of accounting methods that charge customers 
for taxes that are not paid. All of those rate-making methods 
unfairly increase the cash flow of utilities at the expense of 
customers. 

Arthur Andersen & Co. testified before the Subcommittee on 
Energy and Power of the House Committee on Interstate and 
Foreign Commerce in support of including construction work in 
progress in electric utility rate bases. Adoption of that recom- 
mendation would unfairly raise the price of electricity for 
customers. 

An Arthur Andersen & Co. partner testified on behalf of the 
Greater Boston Chamber of Commerce in support of Massachu- 
setts State taxes that would retain a flat tax rate rather than a 
graduated rate, decrease the taxes on unearned income, increase 
the deduction for capital gains to 50 percent, increase the sales 
tax, and widen the sales tax base. 

ARTHUR YOUNG & CO. 

Arthur Young & Co. is one of the smaller "Big Eight" accounting 
firms. The firm's response to this subcommittee's request for informa- 
tion is included in Appendix C beginning on page 658. The index to 
materials submitted gives some examples of questionable activities by 
the firm. (See Appendix C, p. 659.) 

Arthur Young & Co. is the independent auditor for Lockheed Air- 
craft Corp. Lockheed has had financial problems for several years. 



58 

As independent auditor for Lockheed, Arthur Young & Co. has ap- 
proved the use of accounting methods which possibly misrepresent 
Lockheed's actual financial situation. To the extent that it has ap- 
proved such accounting methods, Arthur Young & Co. has served the 
interests of Lockheed's management rather than the public interest. 
The accounting practices used by Lockheed have been described 
to the subcommittee by Dr. Abraham Briloff, Emanuel Saxe Distin- 
guished Professor of Accounting, Baruch College, City University of 
New York. His letter also describes the failures of the SEC and the 
General Accounting Office to perform proper oversight of Lockheed's 
accounting practices in accordance with the loan guarantee enacted by 
Congress. (See Appendix K, p. 1605.) Because of the Federal loan 
guarantee for Lockheed, possibly misleading accounting practices used 
by the company and approved by Arthur Young & Co. are an area of 
special interest to the public, and should be further investigated by 
Congress. 

Arthur Young & Co. is the accounting firm hired last year by Peat, 
Marwick, Mitchell & Co. to provide an "independent" review of the 
firm's quality of practice. Arthur Young & Co. concluded after its 
review that Peat, Marwick, Mitchell & Co. had appropriately compre- 
hensive quality control procedures. It also was "favorably impressed" 
with Peat, Marwick, Mitchell & Co.'s commitment to conduct its prac- 
tice in accordance with professional standards. As described subse- 
quently, the SEC had found multiple cases of improper and faulty 
auditing by Peat, Marwick, Mitchell & Co. (See Appendix C, p. 736.) 

The Wall Street Journal recently reported that Pullman Inc. used 
Arthur Young & Co., its independent auditor, as a conduit for making 
questionable payments overseas. Arthur Young & Co. became involved 
in the affairs of Pullman Inc. by passing $5,000 to a foreign taxpayers' 
association, "presumably" for the purpose of bribing tax officials in 
that foreign country. (See Appendix C, p. 665.) 

Partners of Arthur Young & Co. have made disturbing public state- 
ments regarding the proper role of independent auditors. In an inter- 
view with Forbes magazine, one top partner stated that independent 
auditors should not be expected to discover multi-million dollar slush 
funds, that independent auditors report to corporate managements 
and have little responsibility to the board of directors and the public, 
that independent auditors should have a "positive" attitude about 
using "imaginative" accounting methods for clients so that they will 
not be regarded as a "no" fellow bv a client's management, and that 
the independent auditing relationship should be used to market man- 
agement advisory services to clients. (See Appendix C, p. 663.) 

Another top Arthur Young & Co. partner has stated that the real 
problem with business ethics concerning illegal bribery of foreign 
officials is that the Federal Government has not given businessmen 
prior guidelines on the type of illegal bribes which will be accepted as 
proper in reporting to the public. Without such guidelines, business- 
men are unfairly deprived of knowing when it is all right to commit 
illegal bribery abroad. (See Appendix C, page 664.) 



59 

COOPERS & LYBRAND 

The response of Coopers & Lybrand to this subcommittee's informa- 
tion request is included in Appendix C at page 666. The index to mate- 
rials submitted indicates the type of activities in which the firm has 
engaged. 

One example of Coopers & Lybrand's promoting the interests of its 
clients on controversial issues is the firm's comments to the Federal 
Power Commission (FPC) regarding the treatment of income taxes 
in setting rates for electricity. (See Appendix C, page 674.) After 
noting that the firm is the independent auditor for several electric 
utilities, Coopers & Lybrand advocates the use of "normalized" ac- 
counting for taxes which increases the cash flow of the firm's electric 
utility clients at the expense of customers using electricity. Coopers & 
Lybrand quotes with approval statements by the AICPA and the 
President's Labor-Management Committee which support the use of 
rate-making methods to increase the cash flow of electric utilities. 

The Coopers & Lybrand comments also state that money paid by 
electricity customers for Federal income taxes which are not paid by 
electric utilities is really a donation by the Federal Government, 
rather than by the customers. This subcommittee has conducted re- 
search showing that electricity customers are often charged substan- 
tial amounts for Federal income taxes which are never paid to the 
Federal Government by electric utilities. As a result, customers of 
those utilities have been substantially overcharged, despite the claims 
of Coopers & Lybrand to the contrary. 

In another letter of comment to the FPC, the firm supported the 
inclusion of construction work in progress in the rate bases of utilities, 
as well as the use of more generous earnings allowances for utilities. 
Adoption of the Coopers & Lybrand proposals would result in higher 
rates for customers. Use of such accounting procedures can raise elec- 
tricity rates substantially without alerting customers to the ways in 
which they are being overcharged. Thus, the use of complex account- 
ing procedures, such as those advocated by Coopers & Lybrand, have 
been strongly promoted by electric utilities in recent years. 

Although Coopers & Lybrand acts as independent auditor for regu- 
lated utilities, the firm has instructed certain regulatory commissions 
on how to set utility rates. Customers in those jurisdictions may be 
subject to overcharges, based on the type of rate-making standards 
it has advocated before the FPC. Independent auditors cannot prop- 
erly be involved in enriching regulated utilities at the expense of 
utility customers. 

Coopers & Lybrand was also the auditor for a number of cor- 
porations whose insolvencies led to severe criticism of the firm's prac- 
tices. These included Mill Factors Corp., R. Hoe & Co., International 
Controls Cor])., and Continental Vending Machine Corp. In the latter 
case, two Coopers & Lybrand partners and one manager were indicted 
and convicted for fraud. 



67-159 O - 77 - 6 



60 



ERNST & ERNST 



The response of Ernst & Ernst to this subcommittee's request for 
information is included in Appendix C, at page 686. As shown by the 
index to materials submitted, many of the firm's activities are clearly 
incompatible with its position as an independent auditor. 

One example is its letter of comment to the Cost Accounting Stand- 
ards Board (CASB) regarding a CASB proposal to recognize a por- 
tion of government contractors' profits as a "cost'' to be charged to the 
Federal Government. That proposal has since been adopted by the 
five-member CASB which includes a partner of Ernst & Ernst. 
The firm supported the CASB proposal, but was concerned that it did 
not go far enough. (See Appendix C, page 695.) 

In its letter to the CASB, the firm advocated establishment of alter- 
native, contradictory accounting definitions for the purpose of charg- 
ing more costs to the Federal Government while reporting greater 
profits to the public. The letter states : 

We are in general agreement with the concept that the cost 
of capital should be recognized as an explicit cost of a con- 
tract, and that a contractor need not record this cost in his 
accounting records for financial statement purposes since this 
concept is not now recognized as a generally accepted ac- 
counting principle and may never be so recognized. 

The Ernst & Ernst letter also argues for a higher rate to compen- 
sate contractors, a larger base to which the rate would apply, and 
the consideration of more accounting methods to compensate for 
"costs" that are not actuallv incurred. 

The readiness of "Big Eight" accounting firms to promote alterna- 
tive accounting systems for the purpose of guaranteeing profits of 
their corporate clients illustrates the poor chance of establishing 
uniform and meaningful accounting standards under the leadership 
of the "Big Eight" firms. In this particular case, Ernst & Ernst was 
advocating the use of "costs" which are not normally reco<rnized a? 
costs at all for the sole purpose of increasing contractor charges to 
the Federal Government. A variable definition of "costs" may benefit 
the corporate clients of Ernst & Ernst, but it hinders the develop- 
ment of efficient and proper accounting practices by the Federal 
Government. 

Another example of activities by Ernst & Ernst is the study it per- 
formed for the State of Kentucky on the propriety of fuel adjustment 
clauses used by electric utilities. The major findings of that voluminous 
study are summarized in the letter of transmittal from the firm to the 
chairman of the committee which authorized the study. (See Appendix 
C, page 692.) 

The Ernst & Ernst study recommended that fuel adjustment clauses 
should continue to be used by electric utilities in Kentucky. The study 
found that there was evidence of hard bargaining for the best fuel 
prices by the utilities, and that there are strong incentives to seek 
the best fuel prices, even though the costs are automatically passed to 
consumers. It should be noted that the firm's findings are contrary to 
the evidence presented to Congress during extensive hearings on the 
use of automatic fuel adjustment clause^. 



61 

The findings of the Ernst & Ernst study may be explained by the 
firm's overall work plan described in the letter of transmittal. Ernst & 
Ernst met with representatives from the various electric utilities, then 
had the initial drafts of its recommendations reviewed by the utilities 
to assure that the study's recommendations and presentations were 
"accurate and factual." Apparently, the firm did not meet with custo- 
mers and consumer groups which might oppose use of fuel adjustment 
clauses, nor did the firm review its findings with such groups to assure" 
accuracy. 

The House Legal and Monetary Affairs Subcommittee has criticized 
Ernst & Ernst for the poor quality of work performed by the firm 
for the Federal Law Enforcement Assistance Administration. A news- 
paper account detailing the findings against Ernst & Ernst is included 
in Appendix C, at page 699. 

A final example of the activities of Ernst & Ernst is a recent cor- 
porate tax reduction proposal by the firm to the FASB and the SEC. 
The proposal would permit corporations to adopt a simple "inflation 
accounting" method which would enable them to adjust asset values, 
increase depreciation charges, and pay lower Federal income taxes. 
Consistent with the previously described Ernst & Ernst comments to 
the CASB, the proposal on taxes would permit corporations to use a 
different accounting system for reporting to the public so that publicly 
reported corporate profits would not be reduced. Different accounting 
systems would be used to show different financial results to different 
parties, depending on the image a corporation might want to project. 
(See Appendix C, page 700.) 

HASKINS & SELLS 

The response of Haskins & Sells to this subcommittee's request for 
information is included in Appendix C, at page 701. The index to mate- 
rials submitted indicates the scope of activities undertaken by that 
firm. 

Haskins & Sells was involved in the auditing failures which allowed 
the famous fraud at Equity Funding Corp. of America to continue 
undetected. The trustee in bankruptcy for Equity Funding Corp. has 
found that Haskins & Sells "must share significant responsibility for 
the persistence of the fraud at Equity Funding." Relevant excerpts 
from the trustee's report describing the fraud and the failures of the 
independent auditors are included in Appendix C. at page 704. 
Even a committee of the AICPA, which is controlled by the "Big 
Eight" firms, has found that proper application of auditing standards 
would have uncovered the fraud at Equity Funding. (See Appendix 
C. page 726.) 

The quality of auditing and management advisory services provided 
by Haskins & Sells was the subject of criticism and limitation resulting 
from the failures of four stock brokerage firms — Dempsey-Tegeler. 
Francis I. du Pont & Co., Orvis Brothers & Co., and Hayden Stone — 
which were clients of Haskins & Sells. 

The firm has also been active as a partisan advocate for the inter- 
ests of electric utility moiiopolies. Several of the Nation's largest 
electric utilities hire Haskins & Sells as their independent auditor. 



62 

Representatives of Haskins & Sells have promoted controversial rate- 
making methods to benefit utilities in several parts of the Nation. 

In Florida, Haskins & Sells represented the electric utilities to 
lobby against a bill in the State legislature which would have per- 
mitted utilities to charge customers only for the amount of taxes ac- 
tually paid to the government. In New York, the firm appeared at a 
public hearing held by the Federal Power Commission to argue that 
construction work in progress should be included in electric utility 
rate bases. 

An excellent summary of the partisan positions taken by Haskins 
& Sells on behalf of electric utilities is provided by the discussion out- 
line on "regulatory reform" prepared by Haskins & Sells for the 
AICPA's White House conference on 2 July, 1975. (See Appendix 
C, page 727.) The "regulatory reform" recommended includes giving 
electric utilities more profits through greater returns on equity, as 
well as making basic changes in accounting methods to achieve greater 
cash flow for utilities. All of the "reforms" advocated by Haskins & 
Sells would result in higher electric rates for consumers. 

PEAT, MARWICK, MITCHELL & CO. 

Peat, Marwick, Mitchell & Co. appears to be the largest of the "Big 
Eight" accounting firms in terms of revenue and operations. Its re- 
sponse to this subcommittee's request for information is included in 
Appendix C, at page 730. The materials submitted concerning its activ- 
ities would appear to show a relatively minor amount of questionable 
or improper activities by the firm. 

Along Avith Arthur Andersen & Co. and Touche Ross & Co., Peat, 
Marwick, Mitchell & Co. is one of three "Big Eight" firms which have 
been officially disciplined by the SEC for faulty auditing practices. 
The SEC issued its criticism of Peat, Marwick, Mitchell & Co. in Ac- 
counting Series Release 173. (See Appendix C, page 736.) Account- 
ing Series Release 173 covers improper auditing practices by Peat, 
Marwick, Mitchell & Co. in five separate cases, and provides a detailed 
description of some different types of auditing abuses by "Big Eight" 
firms. The five cases described involve Penn Central Co., Republic Na- 
tional Life Insurance Co., Talley Industries Inc., National Student 
Marketing Corp., and Stirling Homex Corp. 

Peat, Marwick, Mitchell & Co. was the first "Big Eight" firm to hire 
another "Big Eight" firm to review the quality of its practice. Arthur 
Young & Co. was hired to perform the review. According to news 
reports, Peat. Marwick, Mitchell & Co. paid $500,000 for its review. 
Not surprisingly, Arthur Young & Co. produced a favorable opinion 
on the quality of practice by Peat, Marwick, Mitchell & Co. about four 
months after the SEC issued Accounting Series Release 173. (See 
Apnendix C, page 788.) 

One example of questionable activities by Peat. Marwick, Mitchell 
& Co. is the firm's testimonv before the House Ways & Means Com- 
mittee on behalf of an oil and gas company. The testimony advocates 
tax benefits for oil and gas companies, and recommends that intangible 
drilling expenses be allowed as deductions for producing wells, in 
addition to dry wells. (See Appendix C, page 73*2.) 



63 

PRICE WATERHOUSE & CO. 

As noted by the study prepared for this subcommittee by the Library 
of Congress, Price Waterhouse & Co. is the most influential "Big 
Eight" accounting firm because it acts as the independent auditor for a 
great number of the largest corporations in the United States. Its 
response to this subcommittee's request for information is included 
in Appendix C, at page 789. Price Waterhouse & Co. and Arthur 
Andersen & Co. were the only two "Big Eight" firms that cooperated 
fully in providing information requested by this subcommittee 1 . 

The index to materials submitted by Price Waterhouse & Co. shows 
that the firm is actively involved in a variety of questionable activi- 
ties. The firm has taken partisan positions on controversial issues to 
promote its own interests, the interests of corporate clients, and the 
interests of private business groups. It has promoted its views before 
Congress, State legislatures and regulatory authorities. 

A Price Waterhouse & Co. partner who serves as a director of the 
United States Chamber of Commerce recently appeared before the 
Senate Government Operations Committee on behalf of the Cham- 
ber of Commerce. He presented the Chamber of Commerce views on 
regulatory reform, which generally represent the views of large cor- 
porations that are often clients of his firm. (See Appendix C, page 
796.) 

The quality of practice at Price Waterhouse & Co. is also subject 
to question as a result of charges by the SEC of illegal and improper 
activities by General Tire & Rubber Co. Price Waterhouse & Co. is 
the independent auditor for General Tire. The scope of alleged im- 
proper or illegal activities by General Tire which were either not 
found or not required to be disclosed by Price Waterhouse & Co. is 
described in a Wall Street Journal article. (See Appendix C, page 
810.) 

A relevant excerpt from the news article summarizes the SEC 
charges against General Tire: 

The complaint — the broadest against any company since 
the SEC began its foreign payoffs investigations over a year 
ago — charges the concern with making illegal political contri- 
butions in the U.S., paying "gratuities" to military and ci- 
vilian employees of U.S. agencies with which General Tire 
does business, overseas bribes, violation of foreign-currency 
laws, unrecorded "slush funds" and overbilling of foreign 
affiliates for supplies. 

Further, the company and its president, Michael Gerald 
O'Neill, are accused of setting up and maintaining for many 
years elaborate schemes to get around the laws of the U.S. 
and various foreign countries. 

In another case. Price Waterhouse knew of a $1,250,000 bribe paid 
by a client, United Brands Co., to a Honduran official, but did not re- 
quire that the bribe be disclosed in the financial statements of United 
Brands. The details of the Price Waterhouse & Co. decision are con- 
tained in a Wall Street Journal article in Appendix C. at page 800. 



64 

A special review of Gulf Oil Corporation ordered by the SEC also 
raised serious questions regarding Price Waterhouse & Co.'s audit 
of Gulf's internal controls and foreign subsidiaries over a period of 
15 years.* 

TOUCHE ROSS & CO. 

The response of Touche Ross & Co. to this subcommittee's request for 
information is included in Appendix C, at page 812. More than any 
of the other "Big Eight'' firms, Touche Ross & Co. has requested confi- 
dentiality for its response and refused to provide certain information 
to this subcommittee. The views of the firm regarding the amount 
and type of information which should be made available to 
the public on major accounting firms illustrate the need for a require- 
ment that the "Big Eight" and other influential national accounting 
firms report periodically to the Federal Government. 

Touche Ross & Co. is one of the three "Big Eight'' firms which has 
been official^ criticized by the SEC for improper auditing practices. 
In Accounting Series Release 153, the SEC described the firm's faulty 
auditing practices with regard to its audit of U.S. Financial, Inc. 
The SEC recently charged Touche Ross & Co. with violating proper 
auditing standards in two more cases. (See Appendix C, page 820.) 

The index to materials submitted by Touche Ross & Co. shows that 
the firm is very active in testifying before State regulatory commis- 
sions in utility rate cases. As such, it has supported controversial rate- 
making procedures which benefit utilities at the expense of consumers. 
The firm has also testified concerning the amount of profits which 
utilities should earn. 

Influence of the "Big Eight'' Accounting Firms On Federal. 

State, and Local Governments 

This section describes primarily the contractual and direct relation- 
ships "Big Eight" firms have with governmental authorities. Because 
of their broad scope of services, "Big Eight" accounting firms have the 
Federal Government and many State and local governments as clients. 
The "Big Eight" firms perform services for their governmental clients 
on a fee basis, just as they do for clients in the private sector. Some- 
times "Big Eight" firms provide their opinions to the Federal Gov- 
ernment voluntarily. 

Other means of influence are described in different sections of this 
study. For example, the "Big Eight" firms directly and actively in- 
fluence government authorities through public statements, testimony 
before legislative and regulatory bodies, and lobbying efforts. Those 
very influential activities are described in sections of this study dealing 
with the independence and activities of individual "Big Eight" firms. 
( See pp. 48 and 54.) 

As noted previously, the "Big Eight" accounting firms exercise ex- 
tensive indirect influence on government authorities through their 
clients and through other private organizations. Many of these ac- 
tivities are described in sections of this study dealing with the ATCPA. 
the FASB. and the activities of individual "Big Eight" firms. 



* Report of the Special Review Committee of the Board of Directors of Gulf Oil Corpora- 
tion (December 30. 107n) ; tfFC v. Gulf Oil Corp. and Claude C. Wild, Jr., Civil Action 
Xo. 75-0324, U.S. District Court (D.C.). 



65 

This subcommittee requested certain information concerning gov- 
ernment clients in its December 19. 1075 questionnaire to the "Big 
Eight" accounting firms. Their responses are included in Appendix 
A. Reference should be made to those responses for complete infor- 
mation on the subjects described. 

The "Big Eight" firms were asked to identify the agencies and de- 
partments of Federal, State, and local governments that are their 
clients. The lists of governmental clients are generally quite extensive. 
Some of the "Big Eight" firms are more active than others in seeking 
governmental clients, as shown by the client lists. 

Table I on page 30 summarizes the information on the percent- 
age of "Big Eight" firm revenues derived from performing services 
for Federal, State, and local governments. Touche Ross & Co. re- 
quested that its response be kept confidential, but the table shows that 
the percentage of revenues received from governmental clients by the 
other "Big Eight" firms runs from one percent for Ernst & Ernst to 
between five and 10 percent for Arthur Young & Co. Although the per- 
centages are low, the actual amount of revenues received from govern- 
mental clients is substantial for some "Big Eight" firms because their 
total revenues are very large. 

The "Big Eight" firms perform a broad range of services for gov- 
ernmental clients. Many of the services performed for State and local 
governments are auditing and accounting services to determine the 
financial status of those governments and their programs. Services per- 
formed for the Federal Government include management advisory 
services. 

The "Big Eight" accounting firms derive multiple benefits from per- 
forming services for governmental clients, not the least of which are 
the substantial revenues they receive. When performing auditing and 
accounting services, "Big Eight" firms wield the customary influence 
of independent auditors over their clients. They are intimately in- 
volved in the application of auditing and accounting methods which 
may determine whether a tax increase is necessary, or whether mu- 
nicipal bonds may be sold prudently. Like most clients, governments 
respect the judgments of their independent auditors. 

Performance of services for governmental clients may also present 
"Big Eight" firms with an opportunity to benefit private clients. In 
order to influence the direction of government policies and programs, 
many private groups would undoubtedly advise governmental au- 
thorities at no charge. However, the "Big Eight" firms have the 
double benefit of influencing governmental authorities while being 
paid for their advice. 

There are conflicts of interest involved because much of the advice 
provided to government agencies and departments by "Big Eight" 
firms directly or indirectly affects their corporate clients. Clients op- 
erating in industries such as air transportation, communications, or 
electric utilities are affected by policies and procedures adopted by 
Federal and State regulator/ authorities which are also clients of 
"Bier Eight" firms. 

One recent example of the type of advice given to Federal agencies 
by "Big Eight" firms is a Price Waterhouse & Co. study of the ac- 
counting policies which should be applied to cable television operators 



66 

by the Federal Communications Commission (FCC).* A major rec- 
ommendation of the study is that "precise accounting standards are 
not necessary to satisfy the FCC's present requirements." Instead, the 
study recommends that the FCC accept any of the alternative account- 
ing standards that are permitted by the private sector's standard- 
setting bodies. 

Standard-setting bodies in the private sector have always been con- 
trolled by the AICPA, which is controlled by the "Big Eight" ac- 
counting firms. A uniform system of meaningful accounting standards 
has never been developed in the private sector. Influential corporate 
clients of the "Big Eight" firms have insisted on retaining alternative 
accounting standards to permit them great flexibility in reporting cor- 
porate earnings. The Price Waterhouse & Co. study recommends that 
the FCC not establish uniform accounting standards which would re- 
strict the flexibility of cable television operators in reporting the 
amount of profits they earn, even though the private sector has failed 
to establish uniform standards. 

Another example of consulting work by "Big Eight" firms is a 
report prepared by Coopers & Lybrand for the Department of Defense 
concerning the adequacy of profits earned by defense contractors. For 
its "Profit '76" study, the Department of Defense wanted to determine 
the attitudes of contractors toward defense procurements. Coopers & 
Lybrand, which lias major defense contractors as audit clients, found 
that defense business is riskier than commercial business, and that 
Federal procurement regulations are unnecessarily complex and 
demanding. 

This subcommittee requested the amount of revenues received by 
"Big Eight" firms for services to the Federal Government in each of 
the past six years. Their responses are summarized in Table I on page 
30. The Touche Ross & Co. revenues from Federal contracts are not 
revealed in that table because the firm asked that its figures not be 
separately disclosed. 

The total revenues received by the "Big Eight" firms from the 
Federal Government in each of the past six years are as follows: 

1970 x $2, 427, 000 

1971 8, 037, 000 

1972 11, 635, 000 

1973 14, 197, 000 

1974 15, 164, 000 

1975 16, 486, 000 

1 Arthur Andersen & Co. and Peat, Marwick, Mitchell & Co. did not submit data for 1970. 

The amount of revenues received by these firms from the Federal 
Government has increased substantially in recent years, indicating 
that the amount of services performed for the Federal Government 
has increased. (It should be noted that Federal contract revenues 
received by individual "Big Eight" firms do not correspond exactly 
to the percentage of their revenues received from government clients. 
The percentage figures shown in Table I include revenues from State 
and local governments, as well as the Federal Government.) 

* Contract FCC-0177, "Study of Accounting Policv Issues and Other Considerations 
Related to the FCC Cable Bureau's Financial Reporting System for Cable Television 
Operators, " submitted June 7, 1976. 



67 

An example of the "free" advice given to the Federal Government 
by "Big Eight" firms is the testimony of representatives from Arthur 
Andersen & Co. and Price Waterhouse & Co. before the Special Sub- 
committee on Integrated Oil Operations of the Senate Committee on 
Interior and Insular Affairs on 21 February, 11)74. Their prepared 
testimony was presented for the purpose of describing the differences 
between "full costing'* and "successful efforts" accounting methods as 
applied by oil and gas companies. (See Appendix C. page 632.) 

Arthur Andersen & Co. and Price Waterhouse & Co. both act as 
independent auditors for major corporations involved in oil and gas 
production. As such, both firms are supposed to remain independent 
from the interests of their clients. Rather than declining to respond 
to any questions which might affect their firms' ability to remain inde- 
pendent, the representatives of Arthur Andersen & Co. and Price 
Waterhouse & Co. freely advocated the controversial views generally 
expressed by managements of oil and gas companies. 

In response to questioning, both firms' representatives stated that 
the 30 largest integrated oil companies are competitive, that the Fed- 
eral Power Commission has restricted the supply of natural gas 
through its pricing policies, and that oil and gas prices are being kept 
too low by Congress. Those views are controversial, and do not fall 
within the expertise associated with independent auditing. Neverthe- 
less, the representatives from Arthur Andersen & Co. and Price Water- 
house & Co. went on record advocating politically and factually 
controversial positions before Congress on issues of great importance 
to the managements of their corporate clients in the oil and gas 
business. 

The "Big Eight" accounting firms provide extensive services to 
Federal. State, and local governments. They are able to directly in- 
fluence the course of governmental policies and programs through per- 
formance of their services. Conflicts of interest occur when "Big 
Eight" firms influence governmental authorities on matters which 
affect their corporate clients. The "Big Eight" firms have been able 
to spread the scope of their influence across both the public and pri- 
vate sectors. 

Quality of Practice by "Big Eight" Accounting Firms 

Application of proper accounting and auditing procedures by "Big 
Eight" firms is vitally important to the Nation's economy and the 
public's welfare. The effects of mistakes and improper practices by 
these firms are amplified because their big corporate clients are large 
enough to have substantial impact on the Nation's economy. To the 
extent that large corporations are able to pursue improper or illegal 
activities through the use of deceptive accounting practices, the public 
is dependent upon the "Big Eight" accounting firms for protection 
against the use of such harmful practices. 

Public realization of defective accounting and auditing practices 
by "Big Eight" firms has too often come only after investors, credi- 
tors, suppliers, customers, and others have suffered severe financial 
losses. Many examples of improper, faulty, and incomplete accounting 
and auditing practices have been brought to public attention. 



68 

Dr. Abraham J. Briloff has documented and clearly explained the 
accounting abuses by "Big Eight" firms in two revealing books.* He 
summarized his research on accounting abuses in testimony before the 
Subcommittee on Oversight and Investigation of the House Commit- 
tee on Interstate and Foreign Commerce on 21 May, 1976. 

His statement before the House Subcommittee on Oversight and 
Investigation appears in Appendix K, page 1609. Reference should be 
made to Professor Briloff 's statement for a comprehensive description 
regarding the quality of practice by "Big Eight'' accounting firms. 

Four of the firms have already been cited for abusive accounting 
practices through actions in the courts and by the SEC. The SEC 
formally disciplined three firms through issuance of accounting re- 
leases. Those firms are Arthur Andersen & Co., Peat, Marwick, 
Mitchell & Co., and Touche Boss & Co. The SEC disciplinary reports 
are referenced in the section of this study describing activities of indi- 
vidual "Big Eight" firms. (See page 54.) 

The trustee in bankruptcy for Equity Funding Corporation of 
America has found that Haskins & Sells "must share significant re- 
sponsibility for the persistence of the fraud at Equity Funding." 
Relevant excerpts from his report are referenced in the section of this 
study on Haskins & Sells. (See page 61.) 

The problems resulting from defective audits by "Big Eight" firms 
derive in large part from their lack of independence as auditors. In- 
formation received by this subcommittee generally confirms that the 
first loyalty of these firms is to the managements of corporate clients 
who retain them and authorize payment of their fees. 

During conversations with the subcommittee staff, representatives 
of "Big Eight" firms and the AICPA have argued that independent 
audits of large corporations cannot be expected to provide real assur- 
ance that corporate financial statements are accurate. The leadership 
of the AICPA has advocated that the public should not expect too 
much from independent auditors of corporations. In line with that 
view, the AICPA is considering proposing Federal legislation which 
would limit the legal liability of independent auditors in civil court 
suits, and protect CPAs from the consequences of their negligence. 

As described in subsequent sections of this study dealing with the 
AICPA, the "Big Eight" firms and the AICPA have been instrumen- 
tal in helping to convince the public that independent auditors can 
affirm the accuracy of financial and other types of information. Al- 
though they have complained that they are powerless to prevent abuses 
by corrupt corporate managements, they have opposed legislation that 
would provide criminal sanctions against corporate executives who 
deliberately mislead independent auditors. 

The position of the AICPA and the "Big Eight" firms is that multi- 
million dollar sums are immaterial to the operations of major cor- 
porations, and that independent auditors should not be expected to ac- 
count accurately for such sums. (See page 121.) That A'iew ignores 
the fact that multimillion dollar sums are very material in their 
absolute impact on individuals and certain segments of the econ- 
omy. Paradoxically, the AICPA and the "Big Eight" accounting 



* Briloff. Abraham J. ; "Unaccountable Accounting. " Harper & Row. New York. N.T. 
(1972) : "More Debits Than Credits," Harper & How. New York. X.Y. (1976). 



69 

firms advocate a lower level of accountability as corporations grow 
larger. 

Large organizations increase the opportunity for improper activi- 
ties by corporate personnel. As described subsequently (see page 101), 
the answer of the AICPA and the "Big Eight" firms to the problem 
of corporate accountability is to lower the expectations of Federal offi- 
cials and the public through legislative and publicity campaigns to re- 
educate the public. 

The real need is to improve independent auditing capabilities so that 
the public, as well as concerned corporate managers, can be assured 
that corporate accounts are accurate. 



CHAPTER II. ORGANIZATION OF THE AMERICAN IN- 
STITUTE OF CERTIFIED PUBLIC ACCOUNTANTS 

Introduction 

As previously mentioned, the AICPA is the preeminent profes- 
sional organization in the field of accounting. Other than the Federal 
agencies and State boards of accountancy which hold the ultimate 
authority to determine accounting matters, the AICPA is the most 
powerful and influential force in shaping the environment in which 
accountants operate. 

The AICPA has extended its power and influence beyond its posi- 
tion as the dominant private accounting organization through close 
relationships with Federal agencies and State boards of accountancy 
that regulate the accounting profession. The dependence of those gov- 
ernmental agencies upon the information and activities of the AICPA 
is the key to its extraordinary and continuing influence. 

The organization and procedures of the AICPA are a primary 
reason for its position of power. The AICPA is presently organized 
to reflect and effectively project the interests of the most powerful ac- 
counting firms — the "Big Eight" — and, to some extent, the next seven 
largest accounting firms. 

This organizational focus has benefitted the AICPA by permitting 
a more easily identified sense of purpose, while also providing the 
necessary resources to accomplish its goals. The coordination of pur- 
pose with resources — which strengthens the AICPA as an organiza- 
tion — is possible because of the vast amount of wealth and influence 
controlled by a small number of very large accounting firms. If the 
same amount of wealth and influence were apportioned among a 
greater number of accounting firms, the community of interest guid- 
ing the actions of the AICPA would be significantly reduced, and its 
organizational purpose would probably become more diffused as a 
consequence. 

The organizational structure of the AICPA permits a dominant 
role for the "Big Eight" and next seven largest accounting firms. It 
also ensures a stable transition of power so that tho c e persons manag- 
ing the organization have great control over the selection of the per- 
sons who will come into power. 

The maintenance of power over the AICPA by the persons pres- 
ently in control is illustrated bv the description of the Nominations 
Committee in the 1975-76 AICPA Committee Handbook. The stated 
objective of the Nominations Committee, which plays an important 
part in the transfer of power, is "to provide for continuity of leader- 
ship and add distinction to the organization by nominating the best 
of the profession for officers, Council and the Board of Directors." 
Continuity of policy and perspective requires organized procedures 
for the selection of iike-minded nominees for positions of influence. 

(70) 



71 

The Nominations Committee is instrumental in selecting the mem- 
bers for five of the six membership groups comprising the AICPA 
council. Those five groups in fiscal 1976 accounted for 198 of the 252 
council members, or 79 percent of the council membership. In turn, as 
explained subsequently, the Nominations Committee is confirmed by 
the council. 

The following is an analysis of the AICPA bylaws which govern 
its procedures. The analysis shows an array of procedural techniques 
for maintaining the status quo regarding control of the AICPA and 
its activities. From a purely organizational viewpoint, the persons 
presently controlling the AICPA are in the most favorable position 
to exercise the procedural tools for their continuing benefit. 

Council 

The council is the basic body for exercising the powers of the 
AICPA, including the authority to prescribe its policies and pro- 
cedures, and to enact resolutions binding upon the board of directors, 
officers, committees, and staff. During fiscal 1976, the council was 
comprised of 252 members. The membership should decline soon to 
about 200 when the number of elected members is reduced from 137 
to 85 as required in the bylaws. The council meets twice a year to 
perform its functions. 

The council is comprised of six membership groups, each of which 
is selected by different methods (see Chart 2 on following page). 
Each council member is entitled to one vote regardless of his method 
of selection. 



72 
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73 

The five groups whose members serve on the council as a result of 
selection by the Nominations Committee are the officers, elected mem- 
bers, members at large, members of the board of directors, and past 
presidents/chairmen of the board. 

OFFICERS 

Seven of the eight officers of the AICPA are council members as 
required in the bylaws. Only the secretary is excluded, and he is not 
required to be a member of the AICPA as are the others. All of the 
officers are elected by the council by majority vote. Six officers are 
nominated by the Nominations Committee. The president and secre- 
tary, both full-time and salaried, are recommended to the council by 
the board of directors. 

The Nominations Committee nominates the chairman of the board, 
vice chairman of the board, three unpaid vice presidents (termed 
volunteers) and the treasurer in advance of the council meeting. Xo 
nominations are permitted from the council floor at the meetings 
where elections are held. This procedural technique pre^ ents election 
of officers due to aroused feelings or personal lobbying; which may 
occur at a council meeting. Continuity of leadership is maintained 
through this procedure. 

Independent nominations may be made by any 20 members of the 
council, if filed with the secretary at least four months prior to the 
annual meeting of the AICPA. As the Nominations Committee pub- 
lishes its nominees to the membership at least five month ; prior to the 
annual meeting, this process allows ample time for all parties to 
develop support for their nominees, and avoids surprise ? which may 
be detrimental to continuity of leadership. 

All of the officers serve one-year terms, except the president and sec- 
retary. They are paid employees of the AICPA and serve unlimited 
terms. Only the treasurer may succeed himself. 

According to the bylaws, the chairman of the board hns the widest 
individual authority within the AICPA. He presides at meetings of 
the AICPA membership, the council, and the board of directors. He 
appoints the members of committees and boards, as well as determin- 
ing the duties, powers, responsibilities, and procedures of the com- 
mittees and boards. The power to appoint committees is very signi- 
ficant since most of the AICPA's activities are handled by committees. 
The chairman also acts as spokesman for the AICPA and appears on 
its behalf before other organizations. 

Under the bylaws, the vice chairman is designated as the next chair- 
man of the board, a provision which ensures stability and continuity 
in the most powerful position in the AICPA. Everyone knows who 
the next chairman will be a year in advance, and there is ample time 
to confirm that he will continue existing policies upon assuming 
power. The vice chairman also presides at meetings in the absence of 
the chairman and familiarizes himself with the duties of chairman. 

The three elected vice presidents perform various duties assigned to 
them, and one is designated to preside at meetings of the AICPA 
membership or the council when the chairman and vice chairman are 
absent. 



74 

The treasurer handles financial matters and advises the board of 
directors on such affairs. The secretary performs the normal duties of 
corporate secretary. 

Second only to the chairman in authority is the president, who has 
full charge of the AICPA's daily affairs. The bylaws give the presi- 
dent full responsibility for the execution of policies and programs 
of the AICPA. He is also designated as a spokesman for the organiza- 
tion and controls its staff. As noted previously, the president is salaried 
and serves an indefinite term. 

ELECTED MEMBERS 

The second — and the largest — membership group within the council 
is the elected members. The bylaws require that each State with one 
or more members in the AICPA have at least one representative on 
the council directly elected by the membership of that State's profes- 
sional CPA society. 

The number of directly elected council representatives from each 
State is determined by the Nominations Committee on the basis of 
the number of AICPA members from each State. There were 137 
elected members on the fiscal 1976 council, but that number will 
diminish to 85 in future years due to the departure of existing elected 
members whose terms were not affected by the size limitations required 
in the bylaws. 

Although this group of council members is elected by a majority of 
the votes cast in each State society election, the procedures by which 
candidates are nominated and elected gives great control over the se- 
lection process to the AICPA's Nominations Committee. At least eight 
months prior to the annual meeting of the AICPA, the Nominations 
Committee requests two suggested candidates from a State society for 
each vacancy to be filled. The Nominations Committee then nominates 
the candidate it prefers at least six months prior to the meeting. The 
bylaws specifically state that the Nominations Committee "shall ^rive 
due consideration to the names so submitted, but shall not be required 
to select its nominees from among such names. In the absence of a 
satisfactory response from any such state society, the Nominations 
Committee shall select the nominees from such state." 

This important provision means that the Nominations Committee 
can contravene the wishes of a State society as to who should be the 
official nominee from that State if the State society attempts to nomi- 
nate someone who is unacceptable to the Nominations Committee. The 
ability of the AICPA's Nominations Committee to influence or even 
decide who represents State societies is even more substantial because 
of the automatic election provision for unopposed official nominees. 

The nominees of the Nominations Committee are automatically de- 
clared elected by the secretary if no independent nominations are filed. 
Thus, the official nominees of the Nominations Committee have a great 
advantage in being elected to serve on council. 

Independent nominations may be made by any 20 AICPA members 
from a State where an election is to be held, but such nominations must 
be filed with the Secretary at least four months prior to the annual 
meeting of the AICPA. 

If independent nominations are properly filed, then the secretary 
mails ballots to all AICPA members in that State at least 90 days 



75 

prior to the annual meeting of the AICPA. To be counted, ballots 
must be returned to the secretary at least 45 days before the annual 
meeting. A majority of the votes returned by that date is needed to 
elect a member to the council. 

The process for choosing elected members for the council is similar 
to the election of officers, in that it avoids surprises at the annual meet- 
ing of the AICPA and gives a decided advantage to nominees chosen 
by the AICPA's Nominations Committee. Unlike the officers, however, 
the elected members are chosen in advance of the annual meeting. 

Elected members of the council serve a three-year term with a limit of 
two consecutive terms. The terms are staggered so that approximately 
one-third of the elected members stand for election each year. This 
procedure is yet another way of preserving organizational stability 
and continuity. 

MEMBERS AT LARGE 

The third group of members on the council as a result of Nomina- 
tions Committee influence is the members at large. The bylaws 
require that seven AICPA members be elected annually by the council 
without regard to their States of residence to serve as members at large 
on the council. Members at large serve three-year terms, so there are a 
total of 21 members at large represented on the council. Consecutive 
terms are limited to two. 

The members at large are nominated and elected in the same manner 
as the officers of the AICPA. They are elected by council after advance 
nomination by the Nominations Committee. Floor nominations are 
not permitted, but any 20 council members may make independent 
nominations in advance through the same procedures followed for 
independent nomination of officers. 

Continuity of established policies is enhanced through the election 
of members at large because prominent members of the accounting 
profession may be elected to the council without regard to propor- 
tional representation based on AICPA membership in each State. 
Council representation of the elected members group is proportional, 
and a State like New York — which is a center of business and account- 
ing — may not be able to elect all of its prominent State society 
members according to a strictly proportional system of council 
representation. 

Electing members at large permits flexibility in having certain 
persons represented on council who are not otherwise included in the 
group of persons exercising the basic powers of the AICPA. For 
example, the managing partners of four of the "Big Eight'' account- 
ing firms were on the fiscal 1976 council through election as members 
at large, and six of the 21 members at large were from New York. 

BOARD OF DIRECTORS 

The fourth membership group on the council is the nine elected 
members of the board of directors. The bylaws provide that all mem- 
bers of the board are ex officio members of the council. The board of 
directors is nominated and elected under the same bylaw as the 
officers and members at large, so the Nominations Committee plays the 
same influential role in the board's selection. Advance nomination and 
election bv the council ensure that the elected board members will 



67-159 O - 77 - 7 



76 

reflect the prevailing views within the AICPA. Independent nomina- 
tions in opposition to the Nominations Committee's slate of candidates 
are also restricted in the same manner as independent nominations for 
officers and members at large. 

According to the bylaws, the board of directors includes nine pres- 
ent or former members of the council elected to the board to serve a 
three-year term. There is no limit to the number of terms which may be 
served by an individual, but consecutive terms are not permitted. Con- 
tinuity is assured by having only one-third of the board elected each 
year. The staggered three-year terms for the board members are the 
same as for the elected members and members at large. The full board 
of directors plays an important part in the operations of the AICPA, 
as will be subsequently explained. 

PAST PRESIDENTS AND BOARD CHAIRMEN 

The fifth group of council members who serve as a result of Nomina- 
tions Committee influence is the past presidents and chairmen of the 
board. The bylaws provide that all past elected presidents and chair- 
men of the board shall be council members for life, as long as they 
continue to be members of the AICPA. Although the chairman of the 
board is now the highest elected officer and the president is a paid 
employee, presidents of the AICPA were elected volunteers prior to 
January, 1974. 

The Nominations Committee is responsible for nominating the 
officers who are then elected by council. All past presidents and chair- 
men of the board owe their current position on the council to their 
original nomination and election to office, so the Nominations Commit- 
tee is very influential in the selection of this membership group. 

On the fiscal 1976 council, there were 24 members who were past 
presidents or chairmen of the board, including one member who was 
also a member of the board of directors. The number of past presidents 
and chairmen of the board on council fluctuates according to individ- 
ual lifespans and continued membership in the AICPA. Continuity 
of AICPA policies is obviously greatly enhanced by the continuing 
presence on council of individuals who previously held the top policy- 
making position. 

DESIGNATED STATE REPRESENTATIVES 

The sixth — and final — group of members on the council is the 54 
designated council representatives of State societies. The bylaws pro- 
vide that each State society may designate one of its members as its 
representative on the council according to any method the State society 
may deem appropriate. Representatives from professional accounting 
societies in U.S. territories and possessions are included in this group. 

Designated council representatives of State societies serve one-year 
terms with a limit of six consecutive terms. The accepted practice is 
to designate the president of each State society as its council repre- 
sentative. 

This is the only membership group on the council where the Nomi- 
nations Committee does not influence the selection of council members. 
In that sense, it is the most democratic because the central power struc- 



77 

ture of the AICPA plays no official role in the nomination or election 
of this group of members on council. Continuity of AICPA policies 
is not institutionalized on the national level in the selection of desig- 
nated council representatives of State societies. However, pressures 
for continuity may exist at the State level. 

In summary, the council is the body charged in the bylaws with 
exercising the powers of the AICPA. The selection of new council 
members is basically a continuous process of partial replacement which 
assures that remaining council members, along with the officers and 
directors, will be able to control the direction of the AICPA. Because 
more than 78 percent of the council is nominated by the Nominations 
Committee, and the officers and board of directors are elected by the 
council itself, the existing council members have great influence over 
the selection of new council members. The entire process of choosing 
the council is one which promotes continuity of policies and mainte- 
nance of power by those persons or groups who currently control the 
AICPA. 

Nominations Committee 

The significant role of the Nominations Committee in the selection 
of five of the six membership groups on the council has been described. 
In addition, the Nominations Committee nominates the Trial Board — 
to be discussed subsequently — and allocates the number of elected 
council seats from each State. 

The Nominations Committee implements continuity of policy be- 
cause its seven members are elected by the council to serve that pur- 
pose. The bylaws require that two of the seven members of the Nom- 
inations Committee also be council members. 

Who nominates the pivotal Nominations Committee? The bylaws 
provide that, at the council meeting preceding the annual meeting 
of the AICPA, the retiring chairman of the board and the incoming 
chairman shall present their joint recommendations for members of 
the Nominations Committee for the coming year. The fact that the 
retiring chairman and the incoming chairman — the two most power- 
ful persons in the AICPA nominated by the Nominations Committee — 
are responsible for nominating the Nominations Committee may ex- 
plain why the chairman of that committee is traditionally the im- 
mediate past board chairman of the AICPA. The circularity of the 
process ensures that the policies of the AICPA are continuous and 
reflect the prevailing views of those in control. 

Board of Directors 

Although the council is given the ultimate responsibility for ex- 
ercising the powers of the AICPA. the bylaws provide that the board 
of directors shall act as the executive committee of the council and 
report to the council at least semiannually. The bylaws state that the 
board of directors "shall control and manage the property, business 
and activities of the AICPA, and shall take whatever action it deems 
desirable including the establishment of policies for the conduct of the 
affairs of the AICPA consistent with the provisions of these bylaws, 
resolutions of the membership, or actions of the Council." 



78 

The bylaws provide that the board of directors shall be composed 
of: 

The chairman of the board, the vice chairman of the board, the 
vice presidents elected by the council, the treasurer, and the im- 
mediate past chairman of the board ; 

The salaried president and secretary of the AICPA; and 
Nine present or former members of the council elected to the 
board by the council. 

As in other large organizations, the council has become a sounding 
board for the actions of the board of directors, the chairman of the 
board, and the president. The board is a smaller, more cohesive and 
effective group with the authority to act for the council on a regular 
basis. Meeting approximately once a month, the board works in con- 
junction with the chairman and the president to formulate the work- 
ing policies and pursue the interests of the AICPA through specific 
projects and activities. 

From the standpoint of daily operations, the board of directors, 
the full-time, salaried president and the top elected officers are in 
actual control of the AICPA and its activities. The council approves 
and reviews major policies, but is dependent on the board, the chair- 
man, and the president for the initiation and presentation of specific 
proposals prepared by the AICPA staff. The board, along with the 
chairman and the president, is instrumental in the direction taken 
by the AICPA because it exercises both policy authority and manage- 
ment of the AICPA's staff and resources. Inclusion of the immediate 
past chairman on the board also serves to promote policy continuity 
by the board of directors. 

Apart from its control over the AICPA. the board of directors 
exercises ultimate authority over the Financial Accounting Founda- 
tion (FAF) and the Financial Accounting Standards Board 
(FASB) — the "independent" body within the private sector respon- 
sible for setting accounting standards. The certificate of incorporation 
for the Financial Accounting Foundation specifically provides that 
the board of directors of the AICPA shall ex officio constitute the 
voting members of the FAF, which is a non-profit corporation. The 
organization of the FAF and the FASB is described in detail in an- 
other chapter of this study. (See pp. 138 (FAF) and 142 (FASB)). 

The noteworthy point here is that whoever controls the AICPA's 
board of directors simultaneouslv maintains ultimate authoritv over 
the FAF and the FASB. The'board of directors of the AICPA 
definitely plays a key role within the present framework of the account- 
ing profession and the determination of accounting standards. 

Committees and Boards 

Much of the AICPA's work in specific areas of interest is accom- 
plished by committees, subcommittees, and boards. The 1975-76 Com- 
mittee Handbook of the AICPA lists 108 committees, subcommittees, 
and boards, ranging in membership from one to 43. Most of them have 
from five to 15 members. 

A complete description of all the committees, subcommittees and 
boards and their memberships may be obtained from the AICPA Com- 
mittee Handbook, which is published annually. A listing of all the 
committees, subcommittees, and boards, along with the membership of 



79 

"Big Eight" accounting firms on each one, is included in an appendix 
to this study. (See Appendix E, p. 1078.) It should be noted that 
committees, subcommittees, and boards are all distinct entities within 
the AICPA, and this study will refer to them in general as com- 
mittees for the sake of convenience. 

The bylaws provide that "the chairman of the Board, or his dele- 
gate, may appoint committees and boards with such duties, powers, 
responsibilities, and procedures as he may prescribe. The chairman of 
the Board, the president and the secretary shall have the privilege of 
the floor at meetings of all committees and boards." This provision 
assures that the activities and memberships of committees reflect the 
prevailing views of those in control of the AICPA. 

SENIOR COMMITTEES 

The council may designate any committee as a "senior" committee. 
Appointments by the chairman of the board to senior committees re- 
quire approval of the board of directors. The duties, powers, respon- 
sibilities, and procedures of senior committees are prescribed by the 
council. This process guarantees that committees doing work in impor- 
tant areas will reflect the views of those in control of the AICPA. 

Examination of the senior committees confirms that the truly 
important ones are those subject to board approval. They are : 

Accounting Standards Executive Committee ; 

Auditing Standards Executive Committee ; 

Board of Examiners; 

Federal Taxation Executive Committee ; 

Management Advisory Services Executive Committee; 

Practice Review Committee : 

Continuing Professional Education Executive Committee, and 

Professional Ethics Executive Committee. 

The quotations below regarding the objectives of these senior com- 
mittees appear in the AICPA Committee Handbook. 

Accounting Standards Executive Committee 

The objective of the Accounting Standards Executive Committee is 
"to determine AICPA technical policies regarding financial account- 
ing and reporting standards and generally to be the AICPA's official 
spokesman on those matters. This includes maintaining liaison with 
the Financial Accounting Standards Board and the Cost Accounting 
Standards Board, and issuance, as appropriate, of position papers on 
current accounting standards pending release of official interpretations 
by the FASB." 

Auditing Standards Executive Committee 

The Auditing Standards Executive Committee has the objective "to 
continue the development of auditing and reporting standards." De- 
spite its brief description, this committee exercises tremendous in- 
fluence because it is concerned with defining the proper role of the 
independent auditor. 

Board of Examiners 

The objective of the Board of Examiners is "to establish policy for 
the Examinations Division and to supervise, coordinate, plan, and 



80 

initiate all of the projects, programs and activities of the subcommit- 
tees and task forces of the Board of Examiners. Specific responsibili- 
ties of this committee are to prepare semi-annual uniform examinations 
in accounting theory, accounting practice, auditing and business law 
which may be used by state boards of accountancy for examining CPA 
candidates; to make available to state examining boards a uniform 
grading service; to provide state boards of accountancy with aids to 
candidates for the examination and to serve as liaison between the 
AICPA and the National Association of State Boards of Account- 
ancy on matters pertaining to the examination." 

Federal Taxation Executive Committee 

The objective of the Federal Taxation Executive Committee is "to 
supervise, coordinate, plan and initiate all of the projects, programs 
and activities including budget appropriations of the 12 constituent 
Committees which comprise the Tax Division." The stated objectives 
of the constituent committees comprising the tax division are described 
in Appendix E, page 943. In general, each committee is "to formulate 
and submit to Congress, the Treasury Department and Internal Reve- 
nue Service technical and policy recommendations for improvement of 
the Federal tax process" relating to the areas covered by the com- 
mittees. Those areas are : 

Employee benefits ; 

Financial and estate planning ; 

International taxation ; 

Responsibilities in tax practice ; 

Scope and management of a tax practice ; 

Tax accounting; 

Tax administration ; 

Tax determination ; 

Tax forms; 

Tax policy ; 

Tax publications; 

Taxation of corporate distributions and adjustments; and 

Taxation of special entities and industries. 

Management Advisory Services Executive Committee 

The stated objective of the Management Advisory Services Execu- 
tive Committee is "to assist practitioners in performing management 
advisory services consistent with appropriate professional compe- 
tence, ethical standards, and responsibility ; and to develop standards 
and guidelines for this area of professional practice." 

Practice Review Committee 

The objective of the Practice Review Committee is "to reduce devia- 
tions from acceptable reporting practice through education of practi- 
tioners as to the application of GAAP and practices in specific cases, 
and to encourage state societies in developing programs to deal with 
the problems at the local level in cooperation with bankers and other 
credit grantors." The bylaws provide that the Practice Review Com- 
mittee can review specific audit reports of practitioners which appear 
to deviate from accepted standards, but its function is to be merely 
educational, not disciplinary, in nature. Furthermore, case referrals to 
the professional ethics division for disciplinary action are prohibited, 
and all dealings of the Practice Review Committee are to be confiden- 



81 

tial. This committee is not intended to aid enforcement of accounting 
standards in any manner. 

Continuing Professional Education Executive Committee 

The Continuing Professional Education Executive Committee's ob- 
jective is "to establish policies and strategies for the projects, programs 
and activities of the constituent committees and the Continuing Profes- 
sional Education Division." This committee is in charge of all matters 
relating to the requirement and substance of continuing professional 
education for practicing accountants. 

Professional Ethics Executive Committee 

Finally, the Professional Ethics Executive Committee has the objec- 
tive "to develop standards of ethics, promote understanding and volun- 
tary compliance with such standards, establish and present apparent 
violations of the standards and the AICPA's bylaws to the Joint Trial 
Board for disciplinary action, improve the profession's enforcement 
procedures, and coordinate the subcommittees of the Professional 
Ethics Division." This committee is the AICPA's policeman. 

It can be seen that the areas of interest covered by the eight senior 
committees of the AICPA include all the substantive areas of account- 
ancy. Because of the importance of areas in which the senior commit- 
tees work, the bylaws assure that the membership of the senior commit- 
tees shall represent the prevailing views of those persons who control 
the AICPA. 

SENIOR TECHNICAL COMMITTEES 

The bylaws provide that five of the eight senior committees are tech- 
nical committees "authorized to make public statements, without clear- 
ance with the Council or the Board of Directors, on matters related to 
their area of practice." They are : 

Accounting Standards Executive Committee ; 

Auditing Standards Executive Committee ; 

Federal Taxation Executive Committee ; 

Management Advisory Services Executive Committee ; and 

Professional Ethics Executive Committee. 

This remarkable provision means that the five senior technical com- 
mittees can act for the AICPA in the five most important areas of 
accounting. The procedural controls on senior committee membership 
and direction are all the more significant because of the explicit dele- 
gation of organizational authority and independence to these five 
committees. Some activities of these five most important committees 
in the AICPA are discussed subsequently in the section titled "'Activi- 
ties of the AICPA." beginning on page 101. 

JOINT TRIAL BOARD AND OTHER PERMANENT COMMITTEES 

The bylaws provide that certain committees shall be permanent. 
They include the Nominations Committee and Board of Examiners, 
both described previously, and two others. One is the Professional 
Ethics^Division which is headed by the Professional Ethics Executive 
Committee, one of the five autonomous senior technical committees. 
This division investigates potential disciplinary matters involving 
members of the AICPA. It also presents cases alleging violation of the 



82 

bylaws or code of professional ethics before the Joint Trial Board and 
interprets and proposes amendments to the code of professional ethics. 
The fourth permanent committee, which deals with ethics enforcement, 
is the Joint Trial Board. 

Joint Trial Board 

Since 1 August, 1975, the AICPA has operated a joint ethics en- 
forcement plan in conjunction with the State CPA societies. A de- 
scription of the enforcement plan has been prepared by the AICPA in 
response to a request from this subcommittee. It may be found in Ap- 
pendix E at page 898. 

The purpose of the joint enforcement plan is to eliminate duplica- 
tion between the AICPA and the State professional CPA societies in 
disciplining a member of both groups. Sanctions against an offending 
member can be applied jointly by both the AICPA and the State 
society. 

The maximum penalty which the AICPA can impose through its 
professional ethics division and Joint Trial Board is expulsion of a 
member from the membership ranks of the AICPA. A suspension or 
expulsion from the AICPA does not affect the ability of a person to 
practice as a CPA since the AICPA, as a trade association, has no legal 
authority over its members. The right to practice as a CPA is pres- 
ently regulated by State boards of accountancy. Only action by a State 
board under the authority of a State government can initiate the 
removal or suspension of a licensed person from practicing as a CPA. 
A system of regional trial boards is maintained to jointly adjudi- 
cate charges against members. The national review board hears ap- 
peals from actions by the regional trial boards, and also has authority 
to hear complaints originally. The national review board consists of 
36 members of the AICPA in practice who are elected by the council. 
The AICPA bylaws state that a member can be suspended without 
hearing for conviction of a felony, willful failure to file an income 
tax return, or filing or aiding the preparation of a fraudulent tax 
return. 

The Joint Trial Board, after a hearing, can expel a member from the 
AICPA for other offenses by a two-thirds vote of the board members 
present and voting. An AICPA member may be suspended for a 
period not to exceed two years by a majority vote of the board, or 
lesser sanctions may be imposed. 

The bylaws provide that an AICPA member can be sanctioned by 
the Joint Trial Board if : 

He infringes on any of the AICPA bylaws or any provision 
of the code of professional ethics ; 

He is declared by a court of competent jurisdiction to have 
committed any fraud; 

He is found by the Joint Trial Board to have been guilty of an 
act, or to have been convicted of a criminal offense which tends 
to discredit the accounting profession, provided that convictions 
involving crimes of moral turpitude shall automatically result 
in expulsion from the AICPA; 

He is declared by any competent court to be insane or other- 
wise incompetent; 



83 

His license to practice as a CPA is suspended, revoked, with- 
drawn or cancelled as a disciplinary measure by any govern- 
mental authority; or 

He fails to cooperate with the professional ethics division in 

any disciplinary investigation involving him or his associates 

by not responding to interrogatories- within 30 days. 

It is worth noting that an AICPA member apparently cannot be 

sanctioned for substandard or improper auditing and accounting, 

unless one of the enumerated provisions is somehow violated. 

The bylaws allow for reinstatement of a member in the AICPA 
through application to the Joint Trial Board. The board may rescind 
or modify its sanction by a two-thirds vote. Unsuccessful applicants 
for reinstatement may apply again after two years. 

The bylaws also provide for publishing the identity and offenses 
of disciplined members in a periodical of the AICPA. Publishing 
the identity of offenders is not mandator}-, however, and a majority 
of the Joint Trial Board must vote in favor of publication. 

ADVISORY COMMITTEES 

Five advisory committees were formed recently to advise the other 
AICPA committees. The AICPA Committee Handbook describes 
these committees in the following manner : 

Although the AICPA members have a common interest in 
the broad subjects of accounting, auditing, taxes and manage- 
ment, within the membership are various groups whose interests 
and needs are not wholly identical. The Chairman of the Board 
has therefore appointed committees representing the special in- 
terests of those groups to advise existing committees and boards 
with respect to issues of interest to their group. At the present 
time, there are three advisory committees representing prac- 
ticing firms, one representing members in government and in- 
dustry and one representing members in education. The com- 
mittees provide input on behalf of their constituents to existing 
committees and boards; they do not themselves establish policy 
or standards. 
The five advisory committees were formed during 1975 after a num- 
ber of large accounting firms decided that a better method was needed 
to promote the interests of various groups in the AICPA. In response 
to a request from this subcommittee, the AICPA has provided a de- 
tailed list of the membership and recommendations of each advisory 
committee. (See Appendix E. page 905.) 

Three advisory committees are comprised of practicing accountants, 
divided according to the number of members in each firm and the scope 
of a firm's practice. For example, the Group A Advisory Committee 
represents local accounting firms and practice units with less than 50 
professional members. A ''practice unit" is a group of one or more 
accountants organized to provide professional accounting services to 
clients on a fee basis. This committee lias 15 members and represents 
over 17.000 local accounting firms and practice units throughout the 
United States. 



84 

The Group B Advisory Committee represents regional accounting 
firms ranging in size from approximately 50 to 200 professional mem- 
bers. There are 21 members on this advisory committee representing 
all of the 21 firms in this category. 

The Group C Advisory Committee represents the large national 
accounting firms. There are 15 firms in this category — the "Big Eight" 
and the next seven largest accounting firms. Of the 11 seats on the 
Group C Advisory Committee, eight are permanently assigned to the 
"Big Eight" accounting firms. The remaining three seats are filled on 
a rotating basis from a pool comprised of the next seven largest firms. 

The three practice advisory committees provide an organized forum 
for mutual consultation and planning among accounting firms in the 
same approximate size category. The difference between the group A 
committee representing local practitioners and the group B and C 
committees representing regional and national firms lies in the propor- 
tion of group members actually represented on the advisory commit- 
tee. The 15 members on the group A committee are only a small 
fraction of the 17,000 accounting firms and practice units in that 
category, whereas the group B and C committee memberships directly 
represent almost every accounting firm in those categories. 

The remaining two advisory committees are the Educators' Ad- 
visory Committee, with 15 committee members representing the inter- 
ests of 3,401 academic accountants, and the Industry and Government 
Advisory Committee, consisting of 15 members to represent the inter- 
ests of 44,575 accountants in business and government. 

The advisory committee structure permits all of the "Big Eight" 
firms, as well as the rotating members of the next seven firms, to con- 
sult, plan, and coordinate their efforts toward influencing the AICPA's 
policies and activities. Similarly, the 21 regional firms are able to meet 
together on an organized basis to advance their mutual interests. 



CHAPTER III. INFLUENCE OF THE "BIG 
ACCOUNTING FIRMS IN THE AICPA 

Introduction 



EIGHT" 



The organizational structure and procedures of the AICPA have 
been shown to foster continuing control over AICPA policies and 
activities by the individuals and groups which presently hold power 
and exercise influence in the organization. The next step in evaluating 
the directions taken by the AICPA is to identify the individuals and 
groups currently holding those positions in the AICPA. 

That task is not difficult because the positions of power and influ- 
ence in the AICPA are held for the most part by representatives of 
the "Big Eight" and, to some extent, the next seven largest accounting 
firms. The influence wielded by these large national accounting firms 
far exceeds their proportionate representation in the total membership 
of the AICPA. The extent of their influence is related to the vast 
amount of wealth and prestige concentrated in such a small number of 
very large firms. 

A look at the basic size of the AICPA membership and its classi- 
fications helps to put into perspective the influence of the "Big Eight" 
firms. The AICPA has released figures as of 31 January, 1976, show- 
ing the classification of its membership by occupation and size of 
practice unit. For comparison, the percentage figures from 31 July, 
1975 and 1974 are also shown. 

TOTAL AICPA MEMBERSHIP BY CLASSIFICATIONS 



Percent 



Number 
1976 





July 


July 


1976 


1975 


1974 


59.2 


59.1 


60.0 


34.5 


34.6 


33.6 


2.9 


2.9 


3.0 


3.4 


3.4 


3.4 



Occupational classification of members: 

Public accounting 69,719 

Business, industry, miscellaneous 40,578 

Education 3,401 

Government 3,997 

Total 

Sources of practicing membership (firm size): 

Firms with 1 member 

Firms with 2 to 9 members 

Firms with 10 or more, except 25 largest firms. 
25 largest firms 

Total ,_ 



117,695 


100.0 


100.0 


100.0 






15,019 


21.5 
29.6 
10.7 
38.2 


22.1 
29.7 
10.1 
38.1 


21.5 


20, 605 


30.5 


7,441 
26, 654 


9.3 
38.7 







100.0 



100.0 



100.0 



The questionnaire sent to the "Big Eight" firms by this subcommit- 
tee requested the number of persons in each firm who were members 
of the AICPA. Seven of the firms provided that information, and 
Peat, Marwick, Mitchell & Co. responded that it did not know. The 
AICPA membership of the seven firms answering the question total? 
14,395. Based on the ratio of AICPA members to the total number of 
partners and staff in the other seven firms, the subcommittee estimates 

(85) 



86 

that Peat, Marwick, Mitchell & Co. has approximately 3,000 partners 
and employees who are AICPA members. That indicates that the 
total number of AICPA members from "Big Eight" firms is about 
17,400. 

Membership figures released by the AICPA show that it has a total 
membership of 117,695. Thus, approximately 15 percent of the total 
AICPA membership is from the "Big Eight" firms. However, as the 
following analysis demonstrates, their representation in the significant 
areas of AICPA policy-making and activities is much greater than 
15 percent. 

Two factors should be noted when evaluating the representation of 
the "Big Eight" firms on the governing bodies and committees of the 
AICPA. First, an accounting firm is generally represented only once 
in the total membership of any AICPA committee or board. 

The numerical size of a committee or board affects the proportionate 
share of "Big Eight" representation. For example, all the "Big Eight" 
firms are represented on the Editorial Advisory Committee for "The 
Tax Advisor" which has 19 members, a proportionate representation 
of 42 percent. However, all of the "Big Eight" firms are also repre- 
sented on the Cost Accounting Standards Board Committee which has 
only nine members, a proportionate representation of 89 percent. 

Secondly, the position held by a "Big Eight" representative may be 
more important than the proportionate share of their members on a 
governing body or committee. In many cases where the propor- 
tionate membership of "Big Eight" firms is lower than usual, a "Big 
Eight" representative is committee chairman. 

The fiscal 1976 AICPA council consisted of 252 members given the 
power to exercise the ultimate authority of the AICPA as provided 
in the bylaws. The number of council members from "Big Eight" 
firms was 78, or 31 percent of the total council membership. When the 
number of council members from the next seven largest firms is added 
to the "Big Eight" membership, the number rises to 107, representing 
42 percent of the total council. 

Although the proportionate representation of "Big Eight" firms 
on the council was more than double the proportion of their members 
to the total AICPA membership, their representation was even greater 
on certain of the six basic membership groups comprising the council. 
The following table illustrates the number and proportion of "Big 
Eight" members in each of the six membership groups described on 
page 71. 

"BIG EIGHT" REPRESENTATION ON THE FISCAL 1976 AICPA COUNCIL 





"Big Eight" 


"Big Eight' 


ital 


Representatives 


Percentage 


7 


3 


43 


37 


15 


41 


42 


15 


36 


58 


8 


14 


7 


2 


29 


7 


2 


29 


7 


2 


29 


9 


3 


33 


24 


13 


54 


54 


15 


28 



Officers of AICPA 

Elected members: 

For 3 yr 

For2yr 

For 1 yr 

Members at large: 

For3yr 

For 2 yr 

For 1 yr 

Ex officio members of the board of directors 

Past presidents/chairmen of the board „ 

Designated council representatives of State societies. 

Total representation 



252 



78 



31 



87 

Several points should be noted concerning the "Big Eight" repre- 
sentation on the fiscal 1976 council : 

(1) The vice chairman was the managing partner of Haskins & 
Sells, meaning that the next chairman of the board would be from 
a "Big Eight" firm because of the automatic succession procedure 
in the bylaws. As described in the Organization of the AICPA 
chapter, the chairman of the board is one of the most influential 
persons in the AICPA because he appoints the committees which 
perform specific tasks. 

(2) While the total number of elected members is decreasing, 
the number of "Big Eight" representatives almost doubled from 
eight to 15 in the more recently elected groups. Thus, the percent- 
age of "Big Eight" members elected each year jumped from 14 
percent to 41 percent. 

(3) Two of the seven members at large elected each year con- 
sistently represent "Big Eight" firms. 

(4) The majority of "Big Eight" members in the past presi- 
dents/chairmen of the board category indicates that their in- 
fluence in the highest AICPA office has been continuing for many 
years. 

(5) Finally, the relatively low proportion of "Big Eight" rep- 
resentatives among the designated council representatives of State 
societies may reflect the fact that it is the only membership group 
on the council whose selection is not influenced by the Nominations 
Committee. 

Nominations Committee 

The Nominations Committee serves a vital role in the selection of 
over 78 percent of the AICPA council members. Three of the seven 
members on the Nominations Committee, including the committee 
chairman, represent "Big Eight" firms. In addition to being a "Big 
Eight" representative, the Nominations Committee chairman also 
served on the board of directors and was immediate past chairman of 
the board 

As described previously, the Nominations Committee nominates the 
chairman and the vice chairman of the board, who in turn recom- 
mend to the council the members of the Nomination Committee. In 
view of this circular selection procedure, the choice of the immediate 
past chairman of the board to head the Nominations Committee cer- 
tainly promotes the stated objective of the committee to "provide for 
continuity of leadership . . ." 

Board of Directors 

Six of the 18 members on the board of directors, including the imme- 
diate past chairman of the board and the designated next chairman 
of the board, represented "Big Eight" firms. If the board members 
who represented three of the next seven largest firms are added to the 
six "Big Eight" members, it is evident that half of the AICPA board 
of directors was from the 15 big national accounting firms. 

Committees 

The real work of the AICPA in terms of performing certain tasks 
and accomplishing specific goals is handled almost exclusively by the 



88 

AICPA committee structure. The 108 committees, subcommittees, and 
boards listed and described in the 1975-76 AICPA Committee Hand- 
book cover every topic of interest to the accounting profession. They 
range from committees with limited impact, such as the Accounting 
Literature Awards Committee, to committees which are vitally impor- 
tant to the practice of accounting, such as the Auditing Standards 
Executive Committee. 

While the influence of the "Big Eight" firms pervades the AICPA 
committee structure, their representation was concentrated on com- 
mittees performing work in substantive areas that have an extensive 
impact on the actual practice of accounting, and frequently affect 
governmental policies. On several of the most important committees, 
the proportion of "Big Eight" representation exceeded 50 percent. 

For example, there were no "Big Eight" representatives on the Ac- 
counting Literature Awards Committee, which selects for recognition 
articles, monographs, or books that make outstanding contributions to 
the literature of accounting. On the Accountant's Legal Liability 
Committee, however, all of the "Big Eight" firms were represented 
on the 16-person committee. That was half the membership of the com- 
mittee dealing with the extent to which accountants should be legally 
liable for their actions. 

The "Big Eight" representation on AICPA committees is divided 
into three basic categories for the purposes of this analysis. They are 
the senior technical committees, the committees involved with the 
Federal Government, and the other major AICPA committees. For 
each category, there is an accompanying table which graphically 
illustrates the degree of "Big Eight" influence on the committees 
within that category. A list of all AICPA committees showing the 
representation of "Big Eight" firms is contained in Appendix E, 
page 1078. 

SENIOR TECHNICAL COMMITTEES 

The five senior technical committees are the most important commit- 
tees of the AICPA. Their areas of activity encompass the issues and 
decisions which are the most fundamental to the practice of all ac- 
countants, and especially to the large national accounting firms and 
their corporate clients. Because the accounting profession is largely 
self-regulated, and the Federal agencies and State boards of account- 
ancy charged with regulating accountants have chosen to rely upon 
the AICPA to such a great extent, the pronouncements of the senior 
technical committees have become the prescribed standard regarding 
the five most substantive areas of accounting. 

Practicing accountants must follow the edicts of the senior technical 
committees, or risk disciplinary action by governmental authorities, 
as well as the AICPA itself. Despite their tremendous authority, the 
senior technical committees are not responsible to the public. Their 
procedures do not protect either the public or accountants who may 
differ with the committee members. However, the public is ultimately 
affected by these committees because the quality of the financial in- 
formation received from the practice of accounting is directly related 
to the decisions of the senior technical committees. 

The source of power for the AICPA 's senior technical committees 
derives from the decisions of certain Federal and State governmental 
authorities to recognize the rules established by these committees. In 



89 

other words, the standards promulgated by these committees have be- 
come the standards enforced by government authorities which all 
CPAs must follow. 

Although there has been some recent progress in the setting of finan- 
cial accounting standards, the government authorities choosing to rely 
upon the AICPA'S senior technical committees have not insisted upon 
procedural guarantees to protect the public interest. Government au- 
thorities have not required balanced committee membership, oper 
meetings, advance notice, or any of the other procedural guarantees 
generally associated with government efforts to promote the public 
interest. 

Federal agencies and State boards of accountancy have been willing 
to depend on the AICPA's senior technical committees without ensur- 
ing that the committees act in the public interest. As a result, these 
committees operate according to the wishes of their own members. The 
"Big Eight" accounting firms have a dominant position of influence 
on all the senior technical committees. 

As previously described, the AICPA bylaws specifically permit the 
senior technical committees to speak for the AICPA in their respective 
subject areas without clearance of either the board of directors or the 
council — the bodies endowed with its basic policy-making authority. 
In turn, Federal and State governmental authorities have accepted 
the committee decisions as official pronouncements of the AICPA. 

The only procedural safeguard on the powerful senior technical 
committees is the AICPA bylaw requirement that appointments to 
these committees by the chairman of the board be approved by the 
board of directors. In effect, the requirement of board approval only 
enhances the tendency of the appointees to reflect the prevailing views 
of the AICPA's power structure. Although theoretically independent 
of the board of directors, the manner of selection makes it highly un- 
likely that members of the senior technical cor mittees will act against 
the wishes of the AICPA power structure. The interlocking representa- 
tion of the "Big Eight" firms in both the power structure and the com- 
mittee structure provides further assurance that each will complement 
the other. 

Being the designated independent authority to speak for the AICPA 
in the most crucial areas of accounting may not actually insulate the 
senior technical committees from the AICPA power structure. How- 
ever, the special status of these committees effectively insulates their 
operations from the members of the AICPA who do not control the 
power structure. In that respect, the senior technical committees are 
not directly responsible to either the membership of the AICPA or the 
public. Yet, both the public and the accounting profession are pro- 
foundly influenced by the activities of the senior technical committees. 

The functions of each senior technical committee and its "Big 
Eight" representation are as follows: 

Accounting Standards Executive Committee 

The Accounting Standards Executive Committee is the official 
spokesman for the AICPA on matters pertaining to financial account- 
ing standards. Its responsibilities include developing the AICPA posi- 
tion on financial accounting and reporting standards and maintaining 
liaison with the Financial Accounting Standards Board and the Cost 
Accounting Standards Board. 



90 

The issues regarding financial accounting and reporting involve 
the quality and quantity of information shown in financial statements. 
Such issues include the value of assets, depreciation policies, inventory 
amounts, revenue and expense recognition, supporting factual data, 
and many other determinations which control the profits shown by a 
business unit and the information given to the public on business 
operations. The very essence of the need for financial accounting and 
reporting in society, its purpose, and its viability are the issues 
addressed by the Accounting Standards Executive Committee on be- 
half of the AICPA. 

The determination of financial accounting and reporting standards 
has been a controversial issue for many years. Severe problems have 
occurred concerning the presentation and interpretation of informa- 
tion contained in financial statements because uniform accounting 
standards have never been developed or enforced. 

The AICPA committee structure is instrumental in determining 
financial accounting and reporting standards through its role in issu- 
ing statements of position on unresolved accounting matters, and its 
role as advocate of the AICPA position before the FASB and other 
organizations. Complete responsibility for performing these tasks on 
behalf of the AICPA has been assigned to the Accounting Standards 
Executive Committee. 

In fiscal 1976, the Accounting Standards Executive Committee had 
15 members. Eight of them, including the chairman, represented the 
"Big Eight*' accounting firms, a 53 percent share of the AICPA 's 
official voice in one of the most important and basic areas of account- 
ing. Four committee members came from the next seven largest 
accounting firms, giving the 15 largest firms 80 percent of the com- 
mittee membership. Clearly, the Accounting Standards Executive 
Committee was dominated by these firms. 

TABLE II.— "BIG EIGHT" ACCOUNTING FIRM MEMBERSHIP ON AICPA SENIOR TECHNICAL COMMITTEES 



















- 


Per- 
centage 














Peat, 






of total 














Mar- 






com- 




Arthur 




Coopers Ernst 




wick & 


Price 




mittee 




Ander- 


Arthur 


&Ly- 


& 


Haskins 


Mitch- 


Water- 


Touche 


mem- 




sen 


Young 


brand 


Ernst 


& Sells 


ell 


house 


Ross 


bership 


Accounting Standards Executive Com- 


X 


X 


X 


X 


X 


X 


X* 


X 


53 


mittee. 




















Auditing Standards Executive Com- 


X 


X 


X* 


X 


X 


X 


X 


X 


38 


mittee. 




















Federal Taxation Executive Committee 


X* 


X 




X 


X 


X 


X 


X 


47 


Management Advisory Services Execu- 


X 


X 


X 


X 


X 


X* 


X 


X 


53 


tive Committee. 




















Professional Ethics Executive Com- 


X 




X 


X 


X 






X 


50 


mittee. 




















* Chairman. 





















Auditing Standards Executive Committee 

Along with the setting of financial accounting and reporting 
standards, the determination of auditing standards is the most im- 
portant area of concern to accountants. Accounting standards are 
used to determine proper presentation of financial information so 
that it conveys a true picture of the financial status of a business 
unit, whereas auditing standards are used to guide the accountant 



91 

in determining the accuracy and consistency of financial and opera- 
tional data which support the financial statements. 

Meaningful auditing standards are important to businesses .for 
controlling internal costs and operations, but they are most important 
to accountants because of the "attest function/' When accountants 
express an opinion on, or "certify," financial statements, they attest 
that the information presented is reliable because it is supported 
by sound, accurate data. Accountants are actually selling their reputa- 
tions as independent, knowledgeable professionals when certifying 
financial statements for use by third parties. 

The determination of auditing standards, therefore, defines the 
responsibilities of accountants in assuring the accuracy of financial 
and operational data which support financial statements. 

Legal liability of accountants in cases of alleged negligence and 
fraud focuses upon the application of sound auditing techniques which 
would permit an accountant to state with assurance that certified fi- 
nancial statements are a fair presentation of business activities. Audit- 
ing standards are used in defining the legal liability of accountants to 
third parties for false information associated with certified financial 
statements. 

The AICPA performs a key function by setting auditing standards 
in a manner similar to its previous promulgation of accounting stand- 
ards. It develops and publishes generally accepted auditing standards 
(GAAS) as Statements on Auditing Standards (SAS). 

The role of the AICPA in determining auditing standards has not 
been seriously challenged. The Federal Government, State govern- 
ments, and courts of law have tended to accept its definition of proper 
auditing. A continuing series of unexpected major business failures 
combined with revelations of illegal secret funds in large cor- 
porations has raised serious questions about the adequacy of current 
auditing procedures. (See p. 188.) 

The Auditing Standards Executive Committee has been given the 
authority to act and speak on behalf of the AICPA regarding audit- 
ing matters. It exercises the AICPA's power and prestige in setting the 
standards which determine the responsibilities and legal liability of 
accountants. This committee is in the unique position of deciding what 
others may expect from accountants, and releasing their decisions as 
statements on auditing standards. 

Its pronouncements are binding on accountants because Federal and 
State agencies have decided to recognize them. The accounting profes- 
sion, and ultimately the public, depend on auditing standards to es- 
tablish the reliability of financial statements, but the Auditing Stand- 
ards Executive Committee operates autonomously on behalf of the 
AICPA. There are no provisions to guarantee public participation in 
the decision-making process. 

Table II on page 90 shows that all the "Big Eight" accounting 
firms are on the 21-member Auditing Standards Executive Committee. 
Thus, 38 percent of the committee, including the chairman, represents 
these firms. There are also six committee members from the next 
seven largest accounting firms. The combined representation of the 
15 largest accounting firms is thus 14. or two-thirds of the total 
committee membership. 



67-159 O - 77 - 8 



92 

Federal Taxation Executive Committee 

Unlike the other four senior technical committees, the Federal Tax- 
ation Executive Committee is not involved in setting standards which 
affect the practice of all accountants. Instead, this committee is the 
designated voice of the AICPA regarding all aspects of Federal taxa- 
tion. Its purpose is to influence Congress, the Treasury Department, 
and the Internal Kevenue Service on matters of tax policy and tech- 
nical application of the tax laws. 

In essence, the Federal Taxation Executive Committee is the lobby- 
ing arm of the AICPA on Federal tax matters. Although this commit- 
tee is not involved with setting standards which define the professional 
practice of accountants, it does enunciate the view of the accounting 
profession on the content and application of Federal tax laws. Pro- 
viding advice to clients on Federal taxes is a substantial part of the 
services offered by most accountants, so the committee handling Fed- 
eral tax matters on behalf of the AICPA is important enough to be 
designated as a senior technical committee by the AICPA power 
structure. 

The Federal tax laws are important to all accountants because a 
significant portion of revenues received from their clients is related to 
the performance of tax services. There is a distinction, however, be- 
tween the accountant's valid concern over proper application of exist- 
ing tax laws and attempts by the AICPA to influence tax policy and 
legislation on behalf of clients. When accountants assume a partisan 
stance in favor of their clients' political objectives, they compromise 
their position of independence upon which their professional reputa- 
tion is based. 

There are 15 members on the Federal Taxation Executive Commit- 
tee who are responsible for its activities as well as the activities of its 
13 subcommittees. The "Big Eight" firms hold seven seats, including 
the chairmanship, for a proportional representation of 47 percent. 
Four seats are held by representatives from the next seven largest 
accounting firms, for a total of 11 committee members from the 15 
largest accounting firms. That amounts to 73 percent of the total com- 
mittee membership. 

Data received from the "Big Eight" accounting firms in response 
to this subcommittee's questionnaire shows that the performance of 
tax services averaged 18 percent of their total revenues. Individual 
practitioners and small accounting firms often receive an even greater 
percentage of their revenues from tax services performed for clients, 
but they are not significantly represented on this committee. 

Management Advisory Services Executive Committee 

Table II on page 90 shows that all of the "Big Eight" firms are 
on the Management Advisory Services Executive Committee, and 
that, once acrain, the committee chairman is from a "Big Eight" firm. 
This committee is important because it is assigned to act for the AICPA 
in developing standards and guidelines for the ethical and competent 
performance of management advisory services by accountants. Gov- 
ernmental authorities rely upon the AICPA to determine proper 
standards in this area, and the committee performs the task in the 
name of the AICPA. 

Management advisory services cover a wide range of subject areas 
where businesses hire outside contractors to provide advice or actually 



93 

perform work for them. Some of the better known management ad- 
visory services rendered by accounting firms are executive recruit- 
ment, marketing analysis, plant layout, product analysis, actuarial 
planning and computations, and financial management services. Sev- 
eral large accounting firms — including the "Big Eight" — have actively 
promoted their capability to provide management advisory services, 
and have acquired experts who are not CPAs to perform services in 
those areas. 

As with tax services, a distinction must be made between the proper 
role of accountants in providing management advisory services, and 
the loss of professional independence which results from permitting 
those services to interfere with the accountant's basic accounting and 
auditing responsibilities. Serious problems arise when accountants 
actively expand into areas not truly related to auditing and account- 
ing, or when a client is publicly-owned and third parties expect an 
accountant to be truly independent of the client's management. 

Like the Federal Taxation Executive Committee, the Management 
Advisory Services Executive Committee has not effectively limited 
the role of CPAs in providing non-accounting services. Instead, it has 
encouraged accountants to provide management advisory services on 
a broad scale. 

The "Big Eight" firms have a 53 percent representation on the 15- 
member Management Advisory Services Executive Committee, in- 
cluding the chairman. There are also three representatives from the 
next seven largest accounting firms, for a total of 11 committee mem- 
bers from the 15 largest accounting firms. That is a proportional repre- 
sentation ol 73 percent. 

Professional Ethics Executive Committee 

The Professional Ethics Executive Committee is the last of the five 
senior technical committees which act independently on behalf of the 
AICPA. Since the accounting profession is largely self-regulated, 
governmental authorities tend to rely upon the profession to determine 
its own ethical standards. 

The AICPA has assumed the role of setting ethical standards for 
the accounting profession, and the Professional Ethics Executive 
Committee has been assigned that task. Ethical standards determine 
what services an accountant may properly offer and the manner in 
which such services are offered. 

For example, advertising by accountants, independence of account- 
ants, and relationships with clients are all areas covered by the pro- 
fessional code of ethics. By defining the manner in which accountants 
may practice, the code of ethics greatly affects the reputation as well 
as the earnings of accountants. 

The Professional Ethics Executive Committee is also responsible 
for establishing and presenting apparent violations of ethical stand- 
ards before the AICPA's Joint Trial Board. The committee is there- 
fore in a position to decide who shall be charged and whether lesser 
administrative action should be applied to ethics code violators. 

The Professional Ethics Executive Committee has ten members, 
five of whom are from "Big Eight" firms. The 50 percent representa- 
tion of the "Big Eight'' is increased to 60 percent from the 15 largest 
firms when the committee member from one of the next seven largest 
firms is included. 



94 

There are three subcommittees associated with the Professional 
Ethics Executive Committee, and the "Big Eight" have a commanding 
position on all of them. 

In summary, it is evident that the five senior technical committees 
are authorized to act independently for the AICPA in their respective 
subject areas, which are the five most important areas affecting the 
practice of accounting. Table II on page 90 shows that the "Big 
Eight" firms dominate all five committees, and that four of the com- 
mittee chairmen are from "Big Eight" firms. Together with the next 
seven largest accounting firms, they have an overwhelming majority 
on each committee. The actions taken by these committees are thus 
controlled by the 15 largest accounting firms in the United States. 

AICPA Committees Involved With the Federal Government 

Many committees of the AICPA deal with the Federal Government 
in one way or another, but several AICPA committees were specifi- 
cally established to handle matters with certain arms of the Federal 
Government. These committees are of special interest to Congress 
because they determine the positions taken by the AICPA on issues 
before the Federal Government. Table III below shows the heavy 
concentration of "Big Eight" firm representation on these committees. 

TABLE III.— "BIG EIGHT" ACCOUNTING FIRM MEMBERSHIP ON AICPA COMMITTEES INVOLVED WITH THE 

FEDERAL GOVERNMENT 











Per- 










centage 






Peat, 




of total 






Mar- 




com- 


Arthur 


Coopers Ernst 


wick & 


Price 


mittee 


Ander- 


Arthur & Ly- & 


Haskins Mitch- 


Water- 


Touche mem- 


sen 


Young brand Ernst 


& Sells ell 


house 


Ross bership 



Cost Accounting Standards Board 
Committee XX*XXXXXX 89 

Federal Government Executive Com- 
mittee X XX*XXXXX 73 



Federally Assisted Programs Sub- 
committee X* X X 

Financial Institutions Subcommittee X X X 

Relations With GAO Subcommittee X X 

Regulated Industries Subcommittee. ._ XXX 

Federal Taxation Executive Committee. X * X 

Employee Benefits Subcommittee X X 

International Taxation Subcommittee.. X X* X 

Tax Accounting Subcommittee X 

Tax Policy Subcommittee X X 

Taxation of Corporate Distributions 

and Adjustments Subcommittee X X 

SEC Regulations Committee X X X 



X 


X 


X 


X 




50 


X* 


X 


X 


X 


X 


67 


X 


X 


X 


X 


X* 


70 


X 


X* 


X 


X 


X 


73 


X 


X 


X 


X 


X 


47 


X 




- X* 


X 




56 


X 


X 






- X 


60 


X 


X 




.. X 


X 


56 


x 




- X 






44 


x 






X* 




44 


X 


X 


X* 


X 


X 


44 



* Chairman. 

Except for the Federal Taxation Executive Committee, none of 
these committees are senior technical committees. That means the 
chairman of the board can appoint the members and assign respon- 
sibilities of these committees completely on his own. Unlike the senior 
technical committees, however, ordinary committees are not desig- 
nated as independent spokesmen for the AICPA. All ordinary com- 
mittees are responsible to the AICPA 's board of directors. 

COST ACCOUNTING STANDARDS BOARD COMMITTEE 

The Cost Accounting Standards Board Committee's stated objective 
is "to consult with, advise and assist the Cost Accounting Standards 



95 

Board in its efforts to develop uniform cost accounting standards." 
There are nine members on this committee. The chairman and seven 
of the members are from the "Big Eight" accounting firms. The ninth 
member represents one of the next seven largest firms, so the Cost 
Accounting Standards Board Committee is composed 100 percent from 
members of the 15 largest accounting firms. 

FEDERAL GOVERNMENT EXECUTIVE COMMITTEE 

The objective of the Federal Government Executive Committee is 
"to assist in the development of a more effective relationship with 
leaders in the government and executive branch. To identify public 
issues on which the public accounting profession is particularly quali- 
fied to make a contribution. To provide advice on how the accounting 
profession can make its skills available to the government in its effort 
to improve its financial controls." 

This committee was formed to influence Federal Government offi- 
cials and activities on behalf of the accounting profession, as repre- 
sented by the AICPA. That task is to be accomplished through direct 
interaction with the Federal Government, as well as providing advice 
to the senior technical committees and other committees of the 
AICPA. 

Four subcommittees work under the Federal Government Executive 
Committee to help achieve its goals. Each has responsibilities in im- 
portant areas of Federal Government activity. 

The Federally Assisted Programs Subcommittee is "to provide ad- 
vice and assistance to federal agencies responsible for the administra- 
tion of federal assistance programs with the development of effective 
audit programs which are consistent with broad federal policies. To 
advise senior technical committees and AICPA members regarding 
relevant matters." 

The Financial Institutions Subcommittee is "to provide advice and 
assistance to federal regulatory agencies for banks, savings and loans, 
and other institutions in consideration of accounting and auditing 
problems. To promote better understanding among credit executives 
as to the services of accountants and the significance of their reports." 

The objective of the Relations With GAO (General Accounting 
Office) Subcommittee is "to provide advice and assistance to the GAO 
in matters of mutual concern in the public interest. To advise senior 
technical committees and AICPA members regarding relevant 
matters." 

The Regulated Industries Subcommittee is "to provide advice and 
assistance to regulatory agencies in consideration of accounting and 
auditing problems. To encourage conformity between generally ac- 
cepted accounting principles and regulatory accounting requirements. 
To advise senior technical committees of current and anticipated ac- 
counting problems." 

There is presently no conformity among generally accepted account- 
ing principles (GAAP). The goal of the Regulated Industries Sub- 
committee is apparently to encourage Federal agencies to adhere to the 
same confusing standards which plague the financial statements of 
non-regulated industries. The problems associated with GAAP are con- 
sidered elsewhere in this study, but this is another example of the 
AICPA's attempts to influence the accounting practices of the Fed- 



96 

eral Government in a way which is not consistent with proper Federal 
accounting objectives. 

Table III on page 94 shows clearly that the Federal Government 
Executive Committee and its subcommittees are dominated by repre- 
sentatives from the "Big Eight" accounting firms. Not only do they 
have controlling representation on these committees, but all five com- 
mittee chairmen are from "Big Eight" firms. The interest of these firms 
in influencing the Federal Government through the AICPA is evi- 
denced by the fact that all eight firms are represented on the Federal 
Government Executive Committee and two of its subcommittees. Seven 
of the eight firms are on the other two subcommittees. 

If the committee members from the next seven largest firms are 
added to the "Big Eight" membership, the total proportionate repre- 
sentation from the 15 largest accounting firms becomes 82 percent for 
the Federal Government Executive Committee, 71 percent for the 
Federally Assisted Programs Subcommittee, 75 percent for the Finan- 
cial Institutions Subcommittee, and 82 percent for the Eegulated In- 
dustries Subcommittee. 

The membership lists for these AICPA committees also disclose 
that Federal employees serve on two subcommittees. The Federally 
Assisted Programs Subcommittee has one member from the General 
Services Administration and another member from the Department of 
Health, Education and Welfare. The Regulated Industries Subcom- 
mittee has one member from the Rural Electrification Administration 
in the Department of Agriculture. 

As the AICPA is a registered lobbyist, the propriety of Federal 
emplovees serving on AICPA committees which are specifically as- 
signed to influence Federal policies and personnel is highly question- 
able. This is especially true since the views expressed by the AICPA 
reflect the interests of the large national accounting firms. Those views 
are often controversial and detrimental to proper Federal accounting 
practices. Federal employees affect Federal accounting practices 
through the performance of their official duties, and there is no need 
for them to participate in influencing other Federal employees through 
a professional lobbying organization. 

FEDERAL TAXATION EXECUTIVE COMMITTEE 

As previously described on page 80, the Federal Taxation Executive 
Committee is assigned the task of developing AICPA positions on 
Federal tax policies, and promoting those positions before Congress 
and Federal departments. The committee is controlled by the 15 
largest national accounting firms. 

The Federal Taxation Executive Committee directs 13 subcommit- 
tees whose stated objectives are described in Appendix E, page 943. 
"Big Eight" influence is significant on most of them, but five subcom- 
mittees are clearly dominated by the "Big Eight" accounting firms. 
Table III illustrates the representation of the "Big Eight" on those 
five subcommittees. 

The dominant position of the "Big Eight" firms on the Federal tax- 
ation subcommittees is enhanced even further if representatives from 
the next seven largest accounting firms are included. The total pro- 
portional representation of the 15 largest accounting firms on each 
of the five named subcommittees is : 67 percent on the Employee Bene- 
fits Subcommittee ; 80 percent on the International Taxation Subcom- 



97 

mittee; 78 percent on the Tax Accounting Subcommittee; 78 percent 
on the Tax Policy Subcommittee ; and 67 percent on the Taxation of 
Corporate Distributions and Adjustments Subcommittee. 

SEC REGULATIONS COMMITTEE 

The objective of the AICPA's SEC Regulations Committee is "to 
provide advice and assistance to the SEC as to its procedures on ac- 
counting for and auditing of registrants. To advise senior technical 
committees and AICPA members regarding relevant matters." 

This committee operates in the same manner as the Cost Accounting 
Standards Board Committee and the Federal Government Executive 
Committee. Its purpose is to influence the actions of the SEC so that 
they are favorable to the interests of the AICPA. 

The SEC is the most important Federal agency affecting AICPA 
members with publicly-owned corporations as clients. The SEC 
determines reporting requirements of publicly-owned corporations 
under the Federal securities laws, and has the authority from Con- 
gress to set accounting standards. Actions taken by the SEC may 
override standards set by the accounting prof ession for its own bene- 
fit and that of its clients. 

The SEC Regulations Committee has 18 members, eight of whom 
are from the "Big Eight" firms. The committee chairman is a "Big 
Eight" representative. The 44 percent representation of these firms 
increases to 78 percent when the six committee members from the next 
seven largest accounting firms are included. 

In summary, all the AICPA committees formed to deal with the 
Federal Government are controlled by the "Big Eight" accounting 
firms. When the AICPA speaks to the Federal Government, it is the 
voice of the "Big Eight" and, to some extent, the next seven largest 
accounting firms. 

Some other aspects of the AICPA's organized effort to influence 
the Federal Government should be noted. The first is that advice and 
assistance provided to the Federal Government, to the extent it is 
accepted, affects the accounting practices of AICPA members and 
their clients. When CPAs become advocates on controversial and 
political issues — such as fair taxation, the proper amount of public 
reporting, and preferred valuation standards — their claim of inde- 
pendence is seriously eroded. The accountant's assertion of inde- 
pendence is the one quality which sets accountants apart from other 
professions and segments of society. 

Secondly, advice provided to the Federal Government by the 
AICPA and the accounting profession is not free. Certainly, there is 
a cost to the public associated with following accounting* practices 
preferred by the AICPA committee structure, rather than using ac- 
counting practices suggested by other parties with les> of a vested 
financial interest in the outcome. Moreover, the "Big Eight" firms 
offer consulting services to the Federal Government on a fee basis, 
which is yet another source of revenue for them. 

Other Major AICPA Committees 

Several other important AICPA committees are dominated by the 
"Big Eight" accounting firms. Representation by the next seven larg- 



98 

est accounting firms is also substantial on these committees. Table IV 
shows the "Big Eight" participation on each committee. 

TABLE IV.— "BIG EIGHT" ACCOUNTING FIRM MEMBERSHIP ON OTHER MAJOR AICPA COMMITTEES 

Per- 
centage 
Peat, of total 

Mar- corn- 

Arthur Coopers Ernst wick & Price mittee 

Ander- Arthur & Ly- & Haskins Mitch- Water- Touche mem- 

sen Young brand Ernst & Sells ell house Ross bership 

Accountants Legal Liability Committee. XXXXXXXX 50 

Relations With Actuaries Committee X X X X X X* X 78 

State and Local Government Auditing 

Subcommittee X* X X XXX 40 

Statistical Sampling Subcommittee XXXXXXXX* 53 

Stockbrokerage Auditing Subcom- 
mittee XXXXXX*XX 67 

Board of Directors of the AICPA X XXX X X 33 

Planning and Finance Committee X X X X* 57 

Computer Services Executive Com- 
mittee X* X XXX 50 

Fditorial Advisory Committee: "Jour- 
nal of Accountancy" X X X X(2) X(2) X 19 

Editorial Advisory Committee: "The 

Tax Advisor" X XXXXXXX 42 

Information Retrieval Committee X X X X ¥ X X X X 62 

International Practice Executive Com- 
mittee XXXXXXXX 44 

Practice Review Committee X XXX 40 

* Chairman. 

The objectives of these committees as stated in the AICPA Commit- 
tee Handbook is included in Appendix E at page 946. A complete list 
of all committee objectives and memberships is also contained in the 
committee handbook, which may be obtained from the AICPA. 

The composition of the Planning and Finance Committee illus- 
trates how the "Big Eight" accounting firms maintain control over 
the AICPA organization and staff through dominant representation 
on key committees. 

Four of the seven members on this committee represent "Big Eight*' 
firms, a 57 percent representation. The Planning and Finance Com- 
mittee determines the compensation of AICPA staff officers. Two of 
the seven members are full-time salaried staff officers of the AICPA. 
Four of the five other members come from "Big Eight" firms. Thus 
they provide 80 percent of the non-staff membership on the committee 
which determines the salaries and benefits of the officers who adminis- 
ter AICPA programs and direct the AICPA staff. 

To supplement the information on "Big Eight" committee member- 
ship shown in Table IV, the following list shows the proportionate 
representation of the largest 15 accounting firms on the other major 
AICPA committees : 

Accountants' Legal Liability Committee : 12 of 16 members 
from the largest 15 firms; 75 percent of the total committee 
membership. 

Relations with Actuaries Committee : 8 of 9 members from 
the largest 15 firms: 89 percent of the total committee member- 
ship. 

State and Local Government Auditing Subcommittee: 6 of 15 
members from the largest 15 firms: 40 percent of the total com- 
mittee membership. 



99 

Statistical Sampling Subcommittee : 12 of 15 members from 
the largest 15 firms; 80 percent of the total committee mem- 
bership. 

Stockbrokerage Auditing Subcommittee : 10 of 12 members 
from the 15 largest firms; 83 percent of the total committee 
membership. 

Board of Directors of the AICPA : 9 of 18 members from the 
15 largest firms; 50 percent of the total committee membership. 

Planning and Finance Committee: 4 of 7 members from the 
15 largest firms; 57 percent of the total committee membership. 

Computer Services Executive Committee : 6 of 10 members 
from the 15 largest firms; 60 percent of the total committee 
membership. 

Editorial Advisory Committee — "Journal of Accountancy": 
12 of 43 members from the 15 largest firms; 28 percent of the 
total committee membership. 

Editorial Advisory Committee — "The Tax Advisor": 13 of 
19 members from the 15 largest firms; 68 percent of the total 
committee membership. 

Information Retrieval Committee: 11 of 13 members from the 
15 largest firms; 85 percent of the total committee membership. 

International Practice Executive Committee : 15 of 18 members 
from the 15 largest firms; 83 percent of the total committee mem- 
bership. 

Practice Review Committee: 6 of 10 members from the 15 larg- 
est firms; 60 percent of the total committee membership. 

Advisory Committees 

As described previously on page 83, the 15 largest accounting firms 
have their own exclusive advisory committee within the AICPA. This 
committee is one of five formed to promote the special interests of 
various groups before the other AICPA committees. 

A list of the recommendations made so far by each of the five ad- 
visory committees is contained in Exhibit 5 of the AICPA 's response 
to questions from this subcommittee. (See Appendix E, page 905.) 

The complete domination of the important AICPA committees by 
the 15 largest national accounting firms is perhaps best illustrated by 
recommendations of the four advisory committees representing 
AICPA members from the regional accounting firms, local accounting 
firms, academics, and business and government. Each of those advisory 
committees has recommended that its segment of AICPA member- 
ship be given greater participation in the AICPA committee structure. 

Summary 

The "Big Eight" accounting firms effectively control the operating 
structure of the AICPA. They have managed to achieve control 
through representation in policy-making positions and on committees 
which far exceeds their proportional representation among the 
AICPA's membership. 

The next seven largest accounting firms have interests which are 
very similar to those of the "Big Eight" firms. When their representa- 
tion is combined with that of the "Big Eight," the result is outright 



100 

domination of every meaningful aspect of AICPA organization and 
activity. 

About 15 percent of the AICPA's total membership is from the 
"Big Eight'- firms, yet they held 31 percent of the seats on the AICPA 
council and 33 percent of the positions on the board of directors in 
fiscal 1976. The combined representation of the 15 largest accounting 
firms amounted to 42 percent of the council and 50 percent of the board 
of directors. The direct representation of the 15 largest firms is aug- 
mented by their influence in the selection of other council and board 
members who are amenable to their interests. 

Although the "Big Eight" dominate the power structure of the 
AICPA, they have even greater strength on the significant AICPA 
committees. Almost every chairman of a significant committee is from 
a "Big Eight" firm. The direct "Big Eight" representation on the 
important AICPA committees generally amounts to 50 percent or 
more. When representatives from the next seven largest accounting 
firms are included, the representation from the 15 largest firms usually 
reaches at least a two-thirds majority of a committee's membership. 

The control over AICPA committee activities exercised through 
direct representation of the largest accounting firms is supplemented 
by their influence in selecting like-minded AICPA members for the 
remaining committee positions. The influence of the "Big Eight" firms 
is pervasive throughout the AICPA organization, but it is especially 
concentrated on committees concerned with any matters of significance 
to the accounting profession. 

As a rule, an important committee can be recognized by its heavy 
concentration of "Big Eight" members. Nearly all specific AICPA 
activities are handled by committees, and the five senior technical 
committees are even designated independently as the official spokes- 
men for the AICPA within their areas of interest. 

The representation of each "Big Eight" firm on the AICPA's 108 
committees, subcommittees and boards in fiscal 1976 can be summarized 
as follows : 

Arthur Andersen & Co. had 34 persons serving on 43 commit- 
tees, and 5 of them were committee chairmen. 

Arthur Young & Co. had 38 persons serving on 46 commit- 
tees, and 10 of them were committee chairmen. 

Coopers & Lybrand had 37 persons serving on 43 committees, 
and 5 of them were committee chairmen. 

Ernst & Ernst had 37 persons serving on 47 committees, and 
6 of them were committee chairmen. 

Haskins & Sells had 35 persons serving on 44 committees, and 
4 of them were committee chairmen. 

Peat, Marwick, Mitchell & Co. had 36 persons serving on 38 
committees, and 7 of them were committee chairmen. 

Price Waterhouse & Co. had 34 persons serving on 41 com- 
mittees, and 5 of them were committee chairmen. 

Touche Ross & Co. had 40 persons serving on 49 committees, 
and 7 of them were committee chairmen. 
One point of interest is that "Big Eight" firm membership on 
AICPA committees was fairly evenly divided among the eight firms. 
The single most important observation, however, is that the AICPA 
speaks with the voice of the "Big Eight" and, to some extent, the next 
Seven largest accounting firms, when it speaks through its power 
structure or its significant committees. 



CHAPTER IV. ACTIVITIES OF THE AICPA 

Introduction 

The previous two sections have considered the organization of the 
AICPA and the influence of the "Big Eight" and next seven largest 
accounting firms within the AICPA. It has been shown that the 
AICPA is organized in a manner which permits the persons and 
groups who presently control its operating structure to effec- 
tively perpetuate their control of the organization. It has also been 
shown that the "Big Eight" and, to some extent, the next seven largest 
accounting firms have effective control of the AICPA operating struc- 
ture, and are thus in a position to direct its activities and continue 
their control. 

The next step is to examine the activities of the AICPA in order to 
evaluate the effects of the "Big Eight" firms' control over the organi- 
zation which is supposed to represent a diverse membership of over 
117,000 CPAs. The activities of the AICPA are too extensive to be 
described fully in this study, but certain functions and projects high- 
light the nature of its activities. A more complete description of the 
scope of its activities is contained in the AICPA annual report and 
the response of the AICPA to requests by this subcommittee. (See 
Appendix E, page 873.) 

The AICPA bylaws list its objectives and describe the professional 
practice of CPAs. Both of these may be found in Appendix E at 
page 996. These bylaw statements are useful in understanding the 
broad array of activities envisioned as the proper domain of the 
AICPA and its members. 

Certain of the statements concerning the proper activities of CPAs 
are related to the type of clients being served by an accounting firm. 
Notable among these are the AICPA statements describing the in- 
dependence of accountants, the scope of management advisory serv- 
ices, and the proper role of accountants in tax matters. Generally, large 
national accounting firms obtain the bulk of their business from large, 
publicly-owned corporations, while local accounting firms and prac- 
titioners deal mostly with privately-owned businesses and individuals. 
It will be seen that the AICPA consistently supports the interests of 
the big accounting firms, which are primarily concerned with satisfy- 
ing the desires of large corporate clients. 

An example of the AICPA's preoccupation with the interests of 
large national accounting firms at the expense of individual practi- 
tioners and local accounting firms is the demise of the AICPA's Com- 
mittee on Displacement of CPA Firms. That committee was formed 
originally to find ways to help small accounting firms whose clients 
were being taken away by the large national accounting firms. Dis- 
placement of the small firms by the large ones accelerated during the 
period of rapidly increasing corporate merger activity which started 
in the 1960's. and was facilitated by the failure of the AICPA's Ac- 

(101) 



102 

counting Principles Board to eliminate abusive practices used in ac- 
counting for business combinations. 

Although a majority of the AICPA's members who are in public 
practice belong to firms with less than 10 members, almost all of the 
AICPA's resources are devoted to projects which primarily benefit the 
"Big Eight" and the other large national firms. The Committee on 
Displacement of CPA Firms was one of the few projects aimed at help- 
ing small accounting firms, but it was abolished by the AICPA even 
though the committee members believed there were areas where the 
committee could be useful to local accounting firms. 

Perhaps the best indication of the manner in which the AICPA 
works to benefit the big accounting firms is the statement this subcom- 
mittee has obtained from a former member of the Committee on Dis- 
placement of CPA Firms. The former member, who is a partner in a 
prominent small accounting firm, has stated unequivocally that the 
committee was not permitted to expand its activities into meaningful 
areas which might benefit non-national AICPA members, and that it 
was abolished after completing some minor tasks which were accept- 
able to the leadership of the AICPA. (See Appendix K, p. 1733.) The 
staff of this subcommittee has been told of similar experiences with 
AICPA committees by other prominent AICPA members who are 
not affiliated with the "Big Eight" or the other large accounting 
firms. 

Because of the varying interests of accountants on specific issues, 
there is no single position that can be taken by the AICPA to reflect 
the views of all accountants. Yet it claims to speak on behalf of all its 
members, representing a vast majority of the accounting profession. 
Although the committees which speak for it are controlled by a small 
minority of AICPA members from the largest accounting firms, the 
views and activities taken by the AICPA supposedly speak for the 
entire membership. 

As part of its accounting inquiry, this subcommittee requested a list 
of the testimony and comments by the AICPx\ before the Federal 
Government since 1 January, 1975. That list may be found in Ap- 
pendix E, at page 935. Although the abbreviated descriptions do not 
fully disclose the purpose of these activities, the list does provide some 
understanding of the scope of AICPA statements before Congress 
and Federal agencies. The list shows that the AICPA was quite 
active in attempting to influence the Federal Government during the 
15 months covered by this subcommittee's request. 

Some of the AICPA statements mentioned on the list are included 
in Appendix E of this study. They serve as examples of the AICPA 
activities described in this chapter. Interested persons may request 
copies of the other statements directly from the AICPA. 

Several current AICPA activities are described on the following 
padres. They should be evaluated with the understanding that the 
AICPA is a big operation. In fiscal 1975, it spent over $18 million on 
its various activities, according to the AICPA annual report. More 
than $589,000 was spent to influence relations with the Federal Gov- 
ernment. Another $187,000 was spent working on Federal taxation 
matters. 

Large amounts were also spent on relations with other significant 
organizations. It cost $264,000 to promote relations with universities. 



103 

$294,000 for relations with State CPA societies, and $381,000 to influ- 
ence the general public. Accountants are licensed to practice under the 
authority of State law, and almost $190,000 was spent on State legis- 
lation dealing with the regulation o.f accountants. 

These substantial sums clearly show that the AICPA is no small- 
scale operation, and that the ability to control its resources is a definite 
advantage. The amounts spent influencing the Federal Government 
and other groups give rise to the first of the AICPA's many activities. 

Political Program 

According to the 16 February, 1976 report filed with the Secretary 
of the Senate and the Clerk of the House, the AICPA is a registered 
lobbyist before the Congress. The designated lobbying agent is the 
organization's vice president of government relations. The AICPA's 
efforts to lobby Congress are both well-financed and well-planned. 

One example of the AICPA's political planning is a guest editorial 
by its vice president of government relations which appeared 
in the February, 1976 issue of the CPA Journal, a publication 
of the New York State Society of CPAs. (See Appendix E, page 964.) 
The article is titled "A National Political Action Program for the 
Accounting Profession," and outlines procedures to be followed by 
accountants for effective lobbying. After noting that accountants are 
in a distinctive position to influence Congress, the article explains 
the need for lobbying as follows: 

We are in a period in which the services provided by the 
accounting profession are taking on greater and greater eco- 
nomic significance, placing the profession in a more visible 
position to more and more segments of the public. This "new 
awareness" on the part of the public, and in particular the 
federal government as one major segment of the public, 
poses problems for the profession. 

We are witnessing today a phenomenon which has been 
building gradually over the last decade: that is, a growing 
anti-business attitude on the part of Congress. Congress and 
the regulatory agencies have been exhibiting a heightened 
interest in the effects of corporate activity on our daily lives 
and CPAs, being closely associated with business, both 
large and small, are being caught in the web of suspicion 
surrounding business practices. As allegations are made and 
investigations are conducted concerning alleged improprie- 
ties by corporations and their management, more and more 
attention is being focused on the CPA's responsibilities to 
the public and the way in which he is discharging them. 

The editorial calls for legislation to limit the legal liability of 
accountants, and suggests a "key man" program as one method of 
achieving political goals. Under such a program, kev members of the 
accounting profession are designated to establish close relationships 
with Members of Congress. The article concludes. "It is clear that 
tomorrow's decisions are based on the influence of today and that 
having recognized this important lesson, the profession will benefit 
from this increased awareness and commitment to a national political 
program." 



104 

It is revealing that the AICPA views valid public and congressional 
interest over the "greater and greater economic significance" of ac- 
counting services as "problems for the profession"' and "a growing 
anti-business attitude on the part of Congress." Congressional efforts 
to clean up the massive abuses by big corporations uncovered in re- 
cent years can hardly be characterized as "anti-business." Further- 
more, the AICPA unrealistically desires that accountants have "great- 
er and greater economic significance" in our society without having to 
face the "problems" of public awareness on the impact of their 
activities. 

Identifying the interests of CPAs with those of their business cli- 
ents also raises questions as to the self-proclaimed independence of ac- 
countants and the actual interests they are serving. If the accounting 
profession is adequately performing services that benefit the public 
interest, it is difficult to understand the alarm over public recognition 
of the role played by accountants which is expressed in this editorial. 

The AICPA has already started the "key man" political action pro- 
gram mentioned in the article. In a letter to AICPA council members, 
the chairman of the board of directors called a series of special regional 
council meetings during August, 1976 to plot strategy for dealing with 
Congress. (See Appendix E, p. 993.) 

After claiming that "the tempo of activities in Congress that have 
a direct bearing on the accounting profession have increased at an 
alarming rate," the AICPA board chairman stated in his letter : 

There are many current developments which cause us to be 
alarmed about the possibility of government intervention in 
the profession's affairs. Much of the present interest in Wash- 
ington comes from a concern about corporate accountability 
and an environment that is anti-business. The profession is 
viewed as a means of dealing with the perceived need for 
greater accountability. 

The chairman also told the council members that an important part 
of the AICPA's political activities will be a "key man" program in 
every State to effectively communicate the accounting profession's 
views to their representatives in Congress. As described previously, the 
organizational views expressed by the AICPA reflect the views of the 
"Big Eight" accounting firms. 

Once again, the self -proclaimed independence of CPAs from their 
clients is brought into question by the AICPA chairman's indentifica- 
tion of accountants' interests with the interests of big corporate clients. 
It is difficult to regard CPAs as nonpartisan auditors working in the 
public interest when the AICPA's chairman of the board describes 
congressional efforts to rectify bribery, illegal political slush funds, 
misleading financial information and other impediments to free enter- 
prise as evidencing an attitude that is "anti-business." 

Accountants have gained respect and prospered as a result of the 
Federal securities laws and other governmental actions that have re- 
quired financial statements to be verified by independent auditors. 
Federal requirements for independent audits were necessitated by the 
public's need for accurate information on corporate activities which 
have a substantial impact on personal finances, as well as the general 
economy. It is interesting, therefore, to note that the AICPA's chair- 
man describes congressional inspection of the special role it has created 



105 

for CPAs as having "the possibility of governmental intervention in 
the profession's affairs." The problems being studied by Congress in- 
volve the public's affairs, including the extent to which the accounting 
profession and Federal agencies have fulfilled the special public re- 
sponsibilities given to them by Congress. 

The AICPA board chairman's statement that the accounting pro- 
fession is viewed by Congress and the public as a means of dealing 
with the "perceived need for greater accountability" also raises seri- 
ous questions. Disclosures of massive wrongdoing by major corpora- 
tions and their "Big Eight" auditors — some examples of which are 
described in this document — have demonstrated a very real need for 
greater corporate accountability. Congress, the courts, the SEC, and 
private shareholders have been involved in efforts to achieve greater 
accountability by corporate managements for their activities. Those 
efforts depend on accurate information and effective independent 
auditing. The accounting profession evolved originally because of a 
need for greater accountability over business activities, so it is natural 
that the Federal Government and the public regard independent 
auditing as an instrumental part of efforts to improve corporate 
accountability. 

The same theme expressed by the AICPA is sounded in another 
article in the February, 1976 issue of the CPA Journal. (See Appen- 
dix E, page 961.) This article, by two accounting professors, is titled 
"Are Congressionally-Regulated Accounting Principles Desirable ?" It 
speaks of "congressional interference" and concludes : "To be heard by 
Congress, we believe the members of our profession must become a 
political force, a political force to keep the politicians out of the 
accountants' precinct." 

The mood of the AICPA on political and other matters is most 
succinctly stated, however, by a guest editorial in the March, 1976 issue 
of the CPA Journal. (See Appendix E, page 968.) The editorial 
is titled "Looking to the Future," and was written by a past president 
of the AICPA. He is now on the AICPA council and is a senior 
partner at Alexander Grant & Co., one of the 15 largest accounting 
firms. 

The editorial takes the form of a series of recommendations to 
"those who will have the responsibility for charting the future course 
of our profession." The first rule to be observed is, he says : "Strive to 
keep the setting of principles and standards in the private sector — at 
all costs." The presumed validity of this statement is apparently so 
strong that the author does not justify it with reasoning or further 
elaboration. The efforts and effects of the private sector's standard- 
setting ventures are described in subsequent parts of this study. 

The editorial also recommends that accountants be wary of addi- 
tional disclosure requirements, and "get the IRS and the Congress to 
take some cognizance of current value accounting in the tax laws and 
regulations as is the case in Brazil and Chile . . ." 

Another recommendation reflects a continuous theme in AICPA 
literature and activities: "Strive for a mitigation of accountants' legal 
liability; support the efforts being directed toward quality control 
programs; strive to educate the public on auditors' responsibilities." 
The apparent contradiction in urging higher quality standards for 
accountants while simultaneously attempting to limit the legal lia- 



106 

bility of accountants who deviate from the standards is well-accepted 
in AICPA policy statements. 

The AICPA is very definitely a political organization with a well- 
financed effort to influence Congress and other groups, both on matters 
relating to accounting and unrelated matters of political interest to 
the business sector. 

Influencing Federal Tax Policy 

Influencing Federal tax policies and procedures has been one of 
the most important goals of the AICPA, and substantial time and 
resources have been devoted to achieving that goal. The AICPA has 
regularly submitted testimony and statements to the House Committee 
on Ways and Means, the Senate Committee on Finance, and the Senate 
Select Committee on Small Business. Additional statements are di- 
rected to the IRS and other relevant agencies. 

The AICPA biennially prepares a booklet entitled "Recommended 
Tax Law Changes" which it distributes to all Members of Congress. 
Four "Statements of Tax Policy" have also been prepared and dis- 
tributed by the AICPA. These attractive booklets present the official 
AICPA views on controversial tax issues under the following titles: 
"Taxation of Capital Gains," "Value-Added Tax," "Elimination of 
the Double Tax on Dividends," and "Estate and Gift Tax Reform." 
Because of their length, these booklets are not included in this study ; 
however, the views expressed in them are covered to a large extent 
by the following statements. 

Two AICPA statements on tax problems of small businesses were 
submitted to the Senate Select Committee on Small Business on 28 
February, 1975 and 13 November, 1975. The recommendations of the 
AICPA on several highly political and controversial tax issues con- 
sistently support more tax benefits for the accounting profession's 
business clients. 

The AICPA recommendations contained in those two statements 
can be summarized as follows : 

A permanent increase in the investment tax credit, including 
increases in the rate as well as in the types and amount of prop- 
erty which will qualify for the credit ; 

A reduction in the corporate tax rates, both the regular rate 
and the surtax rate ; 

An increase in the corporate surtax exemption ; 
An increase in the minimum accumulated earnings credit, al- 
lowing businesses to retain a larger portion of their earnings in 
their business ; 

Retention of accelerated depreciation methods and further 
liberalization of capital recovery methods; and 

Elimination of "dual taxation" which taxes both corporate 
earnings and distributed dividends. 
The chairman of the AICPA's Federal Tax Division testified before 
the House Ways and Means Committee on 15 March, 1976. The synop- 
sis of the AICPA position briefly summarizes its recommendations 
on estate and gift tax reform. (See Appendix E. p. 981.) 

Finally, the AICPA's summary statement on tax revision before 
the Senate Finance Committee on 18 March, 1976 presents a concise 
view of its position on several tax-related matters. (See Appendix 



107 

E, p. 985.) In addition to liberalizing the taxation of capital gains 
and eliminating the "double tax" on corporate dividends, the state- 
ment on tax revision also recommends continuation of a tax credit, 
rather than a tax deduction, for the amount of foreign taxes paid. 
Regulation of income tax preparers — other than CPAs and attor- 
neys — is also urged, along with a recommendation that only limited 
essential facts of private tax rulings by the IRS be disclosed to the 
public. 

A review of the AICPA's statements before Congress shows no hesi- 
tancy on the part of the representatives of the self-described "inde- 
pendent'' accounting profession to openly advocate more tax benefits 
for the corporate business sector. In fact, the major AICPA recom- 
mendations vary little in substance from those of the recognized busi- 
ness lobbying organizations, such as the National Association of 
Manufacturers and the Financial Executives Institute. Phrases such 
as "capital shortage," "need to stimulate business," and "bias against 
equity investment" abound in AICPA statements. 

The AICPA has clearly failed to recognize any distinction between 
trying to achieve more efficient application of existing tax laws and 
trying to influence tax policies regarding the proper sources of tax rev- 
enues. The clients of local accounting firms and practitioners are pri- 
marily concerned with the efficiency of existing tax laws since they are 
unable to affect tax policies on much more than an individual basis. 
The large corporate clients of the big accounting firms, however, have 
their own lobbyists and industry groups who are actively engaged in 
promoting the political interests of big business. The control of the 
AICPA operating structure by the "Big Eight" accounting firms may 
explain the partisan business views taken as the official AICPA 
position. 

The AICPA also submitted a statement and testimony on Federal 
tax return confidentiality to the Privacy Protection Study Commission 
on 5 March, 1976. Along with its general endorsement for strict con- 
fidentiality of individuals' tax returns, the AICPA urged that cor- 
porations should also be permitted greater secrecy concerning their 
tax affairs, and that the increased protection afforded to individuals 
should be extended to corporations, trusts, and estates. The AICPA 
statement concludes with a call for legislation that would grant a 
privilege to accountants similar to the attorney-client privilege which 
now prevents forcing disclosure of certain matters revealed by a client 
to his attorney. The need for creation of an accountant-client privilege 
is another recurring theme in AICPA literature. 

In a related move, the AICPA recently appointed a special commit- 
tee on privacy legislation. The committee is charged with monitoring 
and analyzing proposed privacy legislation as to how it may affect 
AICPA members and their clients' data systems. Significantly, five of 
the 10 committee members are from "Big Eight" firms. Another three 
members, including the chairman, are from the next seven largest 
accounting firms, meaning that 80 percent of the committee member- 
ship are representatives of the 15 largest accounting firms. 

Other Congressional Lobbying 

An example of other AICPA lobbying before Congress is an AICPA 
position paper on the procurement of CPA professional services by the 

67-159 O - 77 - 9 



108 

Federal Government, which was submitted to a subcommittee of the 
Senate Government Operations Committee on 15 April, 1976. As 
might be expected, the AICPA endorses the use of CPAs to provide 
both auditing and management advisory services to the Federal 
Government. 

The AICPA explains, however, that it is very difficult to determine 
in advance the amount of services which a CPA must perform to sat- 
isfy his contractual and professional obligations. Therefore, the 
AICPA strongly recommends that fixed-price contracts for CPA serv- 
ices be abandoned and replaced with contracts which guarantee pay- 
ment for all materials and time expended by a CPA, no matter what 
that mav encompass. According to the AICPA, the Federal Govern- 
ment "misleads itself" by awarding contracts on the basis of low price 
instead of cost-plus contracts which permit a contractor to respond 
fully to government needs "without financial penalty." 

The AICPA statement warns that professional CPA services soon 
will not be available to the Federal Government unless all known and 
unknown time and materials charges are guaranteed from the start of 
a contract. Special government selection boards staffed with "quali- 
fied" persons are recommended by the AICPA to select as final bidders 
only the firms which have the proper "qualifications." In addition to 
urging restriction of unlimited competition for bids on Federal con- 
tracts, the AICPA states that a government agency should "indicate 
the price range it has in mind" so that prospective contractors will 
know how much to bid. The AICPA counsels that "this information 
allows offerors to tailor their proposals in a manner consistent with 
agency resources ..." Bidding for Federal contracts will certainly be 
easier if the amount the government wants to spend is known in 
advance. 

Another recent AICPA lobbying activity was the successful effort 
to block a congressional directive that the SEC adopt uniform account- 
ing standards for oil and gas companies. Rep. John Moss of California 
had introduced an amendment to the Energy Policy and Conservation 
Act (H.R. 7014) directing the SEC to exercise the accounting author- 
ity given to it by Congress over 40 years ago. Along with the SEC, the 
AICPA was instrumental in changing the legislative language so that 
the SEC would merely perform its usual practice of following the ac- 
counting standards set by the private sector through operation of the 
Financial Accounting Standards Board. Two letters outlining the 
AICPA's objections to the Moss amendment — one to Representative 
II. John Heinz of Pennsylvania and one to Representative Moss — are 
contained in Appendix E, at pages 971 and 976. 

The AICPA was primarily concerned that GAO audits of oil and 
gas companies would supplant CPA audits of the same companies and 
that the premier role of the AICPA in setting accounting standards 
would be undermined. The activities of the AICPA and FASB in 
setting accounting standards are described elsewhere in this study. 
The notable point here is that the AICPA lobbied intensively to defeat 
a proposal to have accounting standards set by an agency responsible 
to the public, rather than by the private groups under the control of 
the AICPA which have determined accounting standards in the past. 

In his letter to Representative Moss, the chairman of the Board of 
the AICPA stated : "We agree that Congress should be assured that 
uniform accounting standards are developed for the petroleum indus- 
try within a reasonable period of time." He then went on to urge that 



109 

such accounting standards be determined in the private sector by the 
FASB in order to "preserve the spirit of cooperation between the pub- 
lic and private sectors which has served the public well over more than 
forty years." 

The AICPA's board chairman did not mention that the failure of 
the private sector to develop uniform accounting standards over more 
than 40 years was the very reason legislation by Congress was neces- 
sary to achieve that goal. The AICPA has continually extolled and 
promoted the "virtues"' of setting accounting standards in the private 
sector, while failing to develop meaningful uniform accounting stand- 
ards through the organizations it controls. This is yet another of the 
contradictory positions assumed by the AICPA. 

The close working relationship between the AICPA and the SEC 
in determining accounting standards has apparently been quite satis- 
factory to both parties. By delegating its statutory authority to set 
accounting standards to private groups controlled by the AICPA, the 
SEC has absolved itself of the responsibility for making difficult de- 
cisions on developing accounting standards in the public interest. In 
return, the AICPA has received a grant of Federal recognition and 
approval for the accounting standards developed by the committees 
and boards it controls.* 

The AICPA and its members are in the unique position of deter- 
mining what accounting standards shall be, applying those accounting 
standards for the benefit of their clients, and having the accounting 
standards they develop and apply officially recognized as authorita- 
tive by the SEC. This remarkable situation is somewhat akin to per- 
mitting the American Bar Association to make the antitrust laws 
which its members must apply to their corporate clients with the 
official approval of the Justice Department and the courts. Under- 
standably, the AICPA is careful to protect its enviable relationship 
with the SEC. 

An example of its protective efforts is the letter sent to Senator 
Philip Hart of Michigan as chairman of the Subcommittee on Anti- 
trust and Monopoly. (See Appendix E, at page 973.) The AICPA ad- 
vised Senator Hart of the SEC's wisdom in setting into motion "a 
most successful mechanism to accomplish the complex task of setting 
accounting and disclosure standards." 

The AICPA letter also notes the SEC's awareness that it is "fiscally 
impractical" for a public agency to undertake the complex business 
of setting accounting standards. The AICPA concludes by recom- 
mending an amendment which would delete a section of the x\ntitrust 
Improvements Act of 1975 giving the Federal Trade Commission 
certain authority to prescribe accounting methods. Despite the allega- 
tions of the AICPA, Chapter X of this study dealing with the Cost 
Accounting Standards Board (CASB) suggests that public agencies 
are able to set accounting standards. (See page 184.) 

Liaison With the Cost Accounting Standards Board 

As previously described, the AICPA has a special committee to 
deal with the CASB. In addition to meeting with the CASB and 



* For an elaboration of the SBC's relationship to the AICPA and other accounting 
groups, see "Corporate Financial Reporting — Public or Private Control" by Professor Robert 
Chatov, the Free Press, a division of Macmillan Publishing Co.. Inc. (1975). 



110 

working with its staff, the committee prepares official AICPA com- 
ments on actions proposed by the CASB. The committee has been so 
successful in its efforts to influence CASB activities that the CASB 
has chosen the AICPA to receive its "public service award." The pro- 
priety of the CASB presenting a public service award to a profes- 
sional lobbving organization is discussed under the section describing 
the CASB. (See p. 186.) 

The CASB sets accounting standards which measure and allocate 
what costs may be properly charged to the Federal Government by 
private contractors performing Federal contracts. Defense contractors 
and others advocate a broad definition of cost because it increases pay- 
ments received from the Federal Government. Money received for pay- 
ment of costs also does not appear in the profit category which is sub- 
ject to readjustment. 

The AICPA has not confined its efforts to commenting on technical 
application of CASB proposals. Instead, the AICPA has actively 
advocated the views of its members' corporate clients on several con- 
troversial areas of Federal contracting policy. The following exam- 
ples demonstrate how the AICPA has used the reputation of CPAs 
for independence to promote the political interests of government con- 
tractors on issues involving public policy judgments. 

The first example concerns the 29 April, 1975 statement and accom- 
panying letters of the AICPA on the CASB's proposal to require that 
actual useful lives of assets be used in computing depreciation as a cost 
to be allowed on Federal contracts. Government contractors prefer that 
artificially short asset lives be used so that depreciation charges are 
greater, and more money is received in the "cost" category from the 
Federal Government. 

The AICPA comments to the CASB state general agreement with 
the latter's proposal that use of actual asset lives is more realistic in 
computing depreciation to determine real costs. However, the AICPA 
expresses concern that the CASB might unduly limit use of accele- 
rated depreciation methods which allow fast write-offs of assets used 
by contractors in performing Federal contracts. Without accelerated 
depreciation, contractors would not be able to charge the bulk of an 
asset's value as a cost to the Federal Government in the first years of 
an asset's actual life. 

The AICPA also warns that the CASB is not protecting govern- 
ment contractors from inflation by insisting on the use of real asset 
lives to compute proper depreciation charges. The AICPA and several 
of the largest accounting firms are engaged with much of the business 
community in a concerted campaign to adjust the accounts of busi- 
nesses for the alleged effects of inflation. The purpose of the campaign 
is to guarantee the purchasing power of the business sector through 
changes in accounting methods which will lead to lower business taxes 
and greater cost allowances by government authorities. 

Another example of the AICPA's efforts to influence the CASB is 
the 14 January, 1976 letter of comment on the CASB's proposal to 
achieve uniform accounting for direct and indirect costs associated 
with Federal contracts. Standard-setting bodies controlled by the 
AICPA have never achieved uniform accounting standards. The 
AICPA recommends to the CASB that exact, uniform standards are 
not necessary, and that broad definitions are sufficient to guide the 



Ill 

many accounting systems developed by government contractors. 
The AICPA concludes: "Any attempt to require a system of com- 
mon cost accounting among all contractors will be costly and 
counterproductive." 

The views expressed by the AICPA echo the original arguments 
against the creation of the CASB. In establishing the CASE, Con- 
gress recognized that the key to sound Federal procurement is a sys- 
tem of meaningful and comparable accounts. The failure to establish 
uniform standards for financial accounting has caused great confusion 
among users of financial statements and substantial financial losses for 
many investors. Once again, the position taken by the AICPA is in 
opposition to the efforts by Congress and Federal agencies to develop 
efficient accounting practices. 

A final example shows the AICPA supporting the allowance of 
"costs" which are not costs at all in normal business jargon. The 
CASB proposed to recognize a certain portion of contractors' return 
on invested capital as a "cost." Normally, any return on contractors' 
invested capital is considered to flow from earned profits- 
Paying a return on capital as a "cost" obviously deviates from 
all accepted business practices, except for those of regulated utilities. 
The AICPA recognized the departure from commonly understood 
business concepts, but. argued that return on capital is an economic 
cost and should thus be charged to the Federal Government as an 
operating "cost." The AICPA position is concisely stated on the first 
page of its 2 February, 1976 letter to the CASB: "We believe the 
standard ultimately promulgated should treat 'cost of money' explic- 
itly as a contract cost as opposed to recognition through pre-negotia- 
tion profit objective." 

This controversial name-change for earnings on Federal contracts 
increases payments to contractors, further removes risks from Fed- 
eral contracts and provides government contractors with yet another 
advantage over competitive businesses in the private sector. It 
should be noted that the additional "costs" to be charged the Federal 
Government are not recognized as costs for computing Federal income 
taxes or reporting profits to the public, but only for seeking increased 
Federal payments. Not only did the AICPA support this departure 
from the goal of a single accounting system and normally accepted 
concepts of profit and cost, but it urged the CASB to use an even 
larger standard of measurement to increase the amount of profits re- 
covered as "costs." The AICPA also encouraged the CASB to consider 
more accounting adjustments which would pay for the alleged effects 
of past and current inflation. Partisan statements on controversial 
policy issues are an integral part of the AICPA 's relations with the 
CASB. 

Liaison Wrrn the Securities and Exchange Commission 

Several AICPA committees attempt to influence the SEC. Because 
the SEC has statutory authority to set accounting standards and dis- 
closure rules for publicly-owned corporations which are the major 
clients of large accounting firms, the AICPA becomes involved in all 
SEC activities that may affect the manner of practice preferred by 
large accounting firms and their corporate clients. Two recent ex- 



112 

amples illustrate the type of concerns expressed to the SEC by the 
AICPA. 

The first is the statement submitted by the AICPA in response to 
SEC Release No. 33-5569. (Disclosure with Respect to Compliance 
with Environmental Requirements and Other Matters.) In its pro- 
posal, the SEC was seeking comments on the amount of information 
which corporations should be required to disclose publicly regarding 
compliance with environmental, equal opportunity, health and other 
social benefit legislation. The SEC has been primarily concerned with 
disclosure of financial information in the past. 

The position taken by the AICPA on corporate disclosure of social 
impact data is something of a paradox. The AICPA notes that collec- 
tion and presentation of social impact data is still relatively primitive, 
and concludes : 

Except in areas in which information requirements are 
specified by regulatory agencies, the quantity and quality of 
information varies enormously if, in fact, it exists within the 
registrant at all. Progress in social measurement can be ex- 
pected in these areas, but initially at least nothing beyond 
'encouragement to report' should be contemplated except, 
perhaps, in areas where governmentally established require- 
ments exist. 

In other words, the AICPA states that meaningful data on impor- 
tant social issues exists only where government regulatory agencies 
have required it to be collected. The AICPA then counsels the SEC — 
a government regulatory agency — merely to encourage corporations to 
report social impact data, rather than require that it be done. This 
paradoxical approach suggests that the government agency charged 
with setting proper disclosure standards should not exercise its au- 
thority because meaningful disclosure will not result unless a govern- 
ment agency sets proper disclosure standards. The peculiar logic 
supporting certain AICPA policy recommendations is sometimes 
confusing to outside observers. 

There are also some contradictions in the second recent example of 
the AICPA's efforts to influence the SEC. This example involves the 
attempt by the AICPA to have the SEC withdraw a rule which re- 
quires an accountant to c tate whether a client's change of accounting 
principles is preferable under the circumstances. The AICPA coupled 
an elaborate supporting statement with a request that the SEC act to 
remove the "preferability" rule in its 23 April. 1976 statement to the 
SEC. 

The AICPA argued that accountants could not make a valid judg- 
ment on whether one of several available accounting principles was 
preferable to others because there are no definite standard? to apply. 
Furthermore, the AICPA stated that the "preferability" rule re- 
quires individual CPA firms to act in a capacity that is properly the 
role of a constituted authority that can set accounting standards. Ex- 
isting auditing standards are sufficient for identifying unwaranted 
changes in accounting principles, according to the AICPA statement. 

The SEC rejected the AICPA's request on the grounds that it is 
reasonable to expect an accountant to make a judgment on the pref- 
erabilitv of accounting principles, and users of financial statements 
should have the benefit of the accountant's judgment. The SEC stated 



113 

that one of the fundamental professional responsibilities of an inde- 
pendent accountant is to apply his skills and trained judgment in 
economic measurement to particular factual circumstances, to deter- 
mine whether the circumstances are fairly accounted for within the 
accounting model. 

The AICPA's request to reduce the responsibilities of accountants 
by withdrawing the SEC's "preferability" rule seems contradictory 
when considered in conjunction with other AICPA activities. For ex- 
ample, standard-setting bodies controlled by the AICPA have operated 
as the "constituted authorities" to set accounting standards for over 
40 years. During all that time, the AICPA has not promulgated a con- 
sistent set of accounting standards to provide uniform accounting 
treatment for the same type of transactions. As a result, there are often 
several different accounting principles which can be applied to a single 
transaction to show wholly different outcomes. 

Yet, in a section of its statement titled "The CPA's Dilemma," the 
AICPA laments that no authoritative body has been able to decide 
upon the nature and content of optimally useful accounting informa- 
tion. After stating that it is thus unfair to require individual account- 
ing firms to express an opinion on the preferability of accounting 
principles, the AICPA concludes: "Users can only benefit from the 
development of uniform standards that will result in similar and con- 
sistent judgments by all CPAs in similar circumstances." 

In view of the fact that the AICPA and its members have been 
in a position to develop uniform accounting standards for more than 
40 years, it is difficult to understand the "CPA's dilemma" as explained 
by the AICPA. Any dilemma over application and choice of account- 
ing standards is self-imposed. 

Another contradiction is posed by the AICPA's effort to reduce the 
significance of an accountant's opinion while continually promoting 
the value of opinions by accountants on many diverse subjects. The 
alleged inability of CPAs to judlge preferable accounting principles is 
sharply at odds with the AICPA's constant efforts to expand reliance 
on and the use of judgments by accountants in both governmental and 
business activities. The promot ion of CPA abilities to analyze facts 
and render opinions is a central theme throughout the spectrum of 
AICPA literature and activities . 

For instance, the AICPA sent its position paper on national health 
insurance to the members of the appropriate congressional commit- 
tees on 23 June. 1075. While professing to be neither for nor against 
the concept of national health insurance, the AICPA does have several 
recommendations on how such a program should be administered. Not 
surprisingly, one of the chief recommendations is a requirement that 
the financial statements of organizations providing national health 
program services be examined annually by a CPA in accordance with 
generally accepted auditing standards." 

The objective of the recommended audits would be to enable a CPA 
f o express an opinion— for which he would assume professional respon- 
sibility—that the financial statements fairly presented the financial 
position of an organization. As stated by the AICPA : 

There are important benefits to be derived from independ- 
ent audits. The most significant would be the independent 
accountant's opinion on the provider's financial statements. 



114 

All interested individuals or groups would benefit from this 
opinion, for without it all they have to rely upon are the 
representations of management. 

Several of the paragraphs used in the official description of CPA 
services contained in the AICPA bylaws also portray a "distinctive 
role" played by CPAs in furnishing objective advice, reviewing activ- 
ities and procedures, and expressing independent opinions. (See 
Appendix E, page 998.) 

The AICPA sometimes takes a position on both sides of an issue, 
depending on the purpose to be achieved by espousing a different posi- 
tion to different parties. With respect to official requirements on the 
responsibilities of independent auditors as promulgated by the SEC, 
the AICPA takes the position that only limited results can be ex- 
pected from the auditing and accounting functions performed by 
CPAs. When addressing clients, potential clients and the public, how- 
ever, the AICPA convincingly portrays the almost boundless benefits 
of services performed by accountants. The confusion which exists over 
the exact role of CPAs has undoubtedly been due in large measure to 
the conflicting views of the AICPA itself. 

Self-Regulation 

In response to public criticism and adverse decisions by the SEC 
and the courts, the AICPA has recently provided three important 
examples of its self- regulatory efforts. These efforts are notable be- 
cause they demonstrate the type of solutions the AICPA regards as 
suitable to handle the problems which face the accounting profession. 
Self -regulatory procedures established by the AICPA are also very 
important to the public because they determine the quality of infor- 
mation which the public receives on business activities from financial 
statements certified by accountants. 

The first example is the voluntary quality control review program 
for CPA firms practicing before the SEC. These are primarily larger 
accounting firms with many publicly-owned clients that are subject to 
SEC reporting requirements. The voluntary quality control review 
program was adopted by the AICPA at its May, 1976 meeting of the 
council. The text of the program is contained in Appendix E, at 
page 1000. 

The purpose of the voluntary quality control review program is to 
establish an inspection system to certify that auditing procedures fol- 
lowed by accounting firms practicing before the SEC are worthy of 
public confidence. The AICPA's answer to the question of who shall 
ensure that large accounting firms are operating competently has seri- 
ous deficiencies. Those deficiencies largely undermine the stated objec- 
tive of the quality control review program, which is to improve the 
performance and credibility of the accounting profession. The major 
deficiencies are listed below : 

The program is entirely voluntary. No protection is provided 
for those who must rely upon accounting firms which do not par- 
ticipate in the program. 

Accounting firms participating in the program can freely leave 
or re-enter the program. While participating firms are permitted 
to identify themselves publicly as participants in the quality con- 



115 

trol review program, no public notice is given when their partici- 
pation is terminated. 

Participating firms are judged by each other, either through 
selection of a particular CPA firm to handle the quality review, or 
through review by a team of representatives from other partici- 
pating firms. When making judgments, reviewers must surely be 
aware that their firms are also subject to review judgments by 
other participants. 

A firm participating in the quality review plan is not required 
to give reviewers access to files on all audit engagements. 

The reviews are to be conducted in accordance with standards 
approved by the AICPA's Auditing Standards Executive Com- 
mittee. As shown previously on page 90, the chairman and two- 
thirds of the members on that committee came from the 15 largest 
accounting firms. Those firms will undoubtedly be the principal 
participants in the review program, and will have a direct interest 
in the effects of the standards they approve. 

Some of the "Big Eight" firms have previously arranged to have an- 
other "Big Eight" firm review them for quality assurance. Last year. 
Peat, Marwick, Mitchell & Co. retained Arthur Young & Co. to review 
its operations. Arthur Young & Co. produced a favorable report on 
that firm's quality of practice, although Peat, Marwick, Mitchell & Co. 
had been disciplined by the SEC for numerous accounting abuses. ( See 
Appendix C, page 736.) 

This year, Arthur Andersen & Co. and Price Waterhouse & Co. have 
retained Haskins & Sells to conduct quality reviews of their firms. The 
trustee in bankruptcy for the Equity Funding Corporation of America 
has found that Haskins & Sells "must share significant responsibility 
for the persistence of the fraud at Equity Funding." (See Appendix 
C, page 721.) The trustee's description of faulty auditing procedures 
followed by Haskins & Sells may cause the public to question the use- 
fulness of a Haskins & Sells opinion on the quality of practice at other 
accounting firms. 

Mutual review of each other's work by the "Big Eight" is an inade- 
quate regulatory tool, especially when the reviewers' own auditing 
practices are questionable. Several examples of improper auditing and 
accounting by "Big Eight" firms have already been brought to public 
attention through actions in the courts and by the SEC. Other cases 
are pending. Some of the publicly-known examples are mentioned in 
the portion of this study that deals specifically with the activities 
of the "Big Eight" accounting firms. (See page 54.) 

The other two recent examples of the AICPA's self-regulatory 
efforts are the exposure drafts issued by the Auditing Standards Ex- 
ecutive Committee on 30 April. 1076. The purpose of these proposed 
position statements is to provide guidance for accountants on matters 
which have created substantial controversy. The first is a proposed 
A1C PA position statement on the independent auditor's responsibility 
for the detection of errors or irregularities. The second is a companion 
proposal on the manner in which accountants should treat illegal acts 
by clients. (See Appendix E. pages 1000 and 1015.) 

Examination of the two A1CPA proposals on illegal acts by clients 
reveals that much of the proposed guidance is actually for the SEC, 
the courts, and persons who have been damaged by illegal acts that 



116 

were undetected or unreported by independent auditors. The guidance 
for these outside parties is that they should not expect too much from 
an audit performed in accordance with generally accepted auditing 
standards (GAAS). The theme that an audit in accordance with 
GAAS cannot be expected to provide assurance that illegal acts have 
not occurred is reiterated throughout the two proposed position 
statements. 

There is some realization in the proposals that the training and 
functions performed by independent auditors should enable them to 
discover illegal acts, or at least the "material" ones. In this regard, the 
second proposal states that an auditor should ask clients about possible 
illegal acts in the hope of learning about government investigations or 
enforcement proceedings. 

Such proceedings may involve violations of laws with respect to 
occupational health and safety, food and drug administration, securi- 
ties, truth in lending, environmental protection, price-fixing or other 
antitrust practices. Of course, the public is not benefitted by the find- 
ings of independent auditors if governmental agencies are already 
aware of irregularities. 

Nevertheless, the proposed AICPA position is that if the indepen- 
dent auditor does not learn of governmental proceedings, or the client's 
management does not tell the auditor of illegal acts, then the auditor 
cannot reasonably be expected to discover violations of the types of 
laws and regulations which have just been described. 

The second proposal concludes : 

. . . The laws and regulations governing those matters are 
highly specialized and complex. Also, they normally relate 
to the operating aspects of an entity rather than its financial 
or accounting aspects. Consequently, determining compliance 
with such laws and regulations is outside the professional 
competence of independent auditors. 

This proposed AICPA statement on the inability of accountants to 
make determinations on non-accounting matters conflicts with the 
AICPA statements before Congress on the many benefits which will 
flow to the Federal Government from using a full range of accounting 
and non-accounting services performed by CPA firms. It also conflicts 
with AICPA statements to the public on the ability of CPA firms to 
provide a wide range of management advisory services unrelated to 
accounting and auditing. Most of all. however, it conflicts with the 
official AICPA description of the professional practice of CPAs which 
is contained in the bylaws :* 

CPAs have a distinctive role in examining: financial state- 
ments submitted to investors, creditors, and other interested 
parties, and in expressing independent opinions on the 
fairness of such statements. This distinctive role has inevita- 
bly encouraged a demand for the opinions of CPAs on a wide 
variety of other representations, such as compliance with 
rules and regulations of government agencies, sales statistics 
under lease and royalty agreements, and adherence to cove- 
nants in indentures. 



* Sop Apprndix E. pa^o 90S for full text. 



117 

Thus the question of CPA competence to make determinations on non- 
accounting matters is another area where the AICPA will take con- 
tradictory positions if the proposal on illegal acts by clients is adopted. 
Although the AICPA apparently believes that the public does not 
understand the role of the independent auditor, there is ample ques- 
tion as to whether the AICPA has a better-defined concept of the 
auditor's responsibilities than has the public. 

There are other problems with the two proposed AICPA statements 
on illegal acts by clients. One is the recommendation in the first pro- 
posal that an accountant adjust the degree of auditing tests and con- 
firmations needed to verify data according to the accountant's own 
evaluation of the client's integrity and reliability. That recommenda- 
tion tends to permit a lesser amount of independent checks and con- 
firmations for records and information supplied by well-established 
companies with good reputations. Many of the greatest abuses uncov- 
ered during the past few years, however, have been committed by 
well-known corporations with established reputations. Those abuses 
demonstrate that stringent auditing procedures should be applied to 
all clients, regardless of size or reputation. 

THE "MATERIALITY" STANDARD 

Another problem with the two proposals on illegal acts by clients 
is the test of "materiality" which pervades all accounting and audit- 
ing standards. The AICPA has long determined that only "material" 
acts by clients should be disclosed, and the same test is proposed for 
reporting illegal acts. Recently, the AICPA proposed that the stand- 
ard of "materiality" should be five percent. (See page 121.) 

The inconsistency in that standard of measurement is that small 
companies with limited influence may be required to report illegal or 
improper expenditures of a few thousand dollars because such 
amounts are deemed "material" to their operations. Giant multina- 
tional corporations exercising great influence, however, may avoid 
disclosing many millions of dollars in illegal or improper expendi- 
tures because such amounts are deemed "immaterial" to their billion- 
dollar operations. 

The relative test of "materiality" equates bigness with goodness. It 
does not recognize the absolute value of significant amounts of money, 
and permits large corporations to do things which have substantial 
impact in absolute terms because the amounts involved may not be 
"material" to total corporate operations. Because of the "materiality" 
test used in applying auditing and accounting standards, big corpora- 
tions are held to a lower absolute standard of accountability than 
smaller companies. 

In following the guidelines proposed by the AICPA on illegal 
acts, there is no requirement that an independent auditor report such 
acts to government authorities. In fact, there are no requirements 
that an independent auditor do anything at all. Instead, there are 
several suggestions that an auditor should "consider" such things as 
qualifying his opinion or withdrawing from the audit engagement. 

The AICPA proposals mention only that illegal or improper acti- 
vities should be reported to appropriately high levels of a client's 
management. The most remnrkable statement in the second proposal is 



118 

that auditors are not responsible for reporting illegal acts to the 
proper government authorities : ''Deciding whether there is a need to 
notify outside parties of an illegal act is the responsibility of manage- 
ment. In the ordinary case, the auditor is under no legal obligation to 
notify outside parties." 

The second AICPA proposal does suggest that auditors seek legal 
advice when deciding which illegal acts are "sufficiently serious" to 
consider taking some other action. All citizens — including account- 
ants — have a legal or moral duty to report illegal acts which come to 
their attention. A professional standard which seeks to require less 
from independent auditors than from other citizens does not promote 
the alleged benefits of self-regulation. 

In the wake of continual revelations of massive illegal activities by 
major corporations, the AICPA proposal that accountants should 
rely upon corporate managements to report their own illegal acts is 
truly extraordinary. It raises serious questions about the self -defined 
role of auditors for publicly-owned corporations. Not only does it 
cast doubt on the independence of auditors from corporate manage- 
ments, it also raises questions about the effective application of the 
securities laws which Congress has enacted for the benefit of investors, 
creditors, government, and the public at large. If the accounting pro- 
fession is unable to determine through self-regulation that independ- 
ent auditors of publicly-owned corporations owe their professional 
allegiance to the public, then Congress must find effective alternatives 
to protect the public interest. The AICPA proposals on illegal acts 
by clients do not establish responsible standards to guide CPAs in 
serving the public interest. Instead, they aid corporate managements 
in pursuing their own self interests. 

Study Commissions 

The AICPA establishes study commissions to analyze major con- 
ceptual problems facing the accounting profession and make recom- 
mendations on acceptable solutions to those problems. The AICPA 
selects members of commissions from what it considers to be a broad 
base of representation — from the accounting profession and various 
interest groups such as major corporations, securities lawyers, and 
stockbrokers. 

Perhaps the most famous AICPA study commission was the Study 
on Establishment of Accounting Principles, better known as the 
"AVheat study group" after its chairman, Francis M. Wheat, a for- 
mer member of the SEC. The Wheat study group was formed by the 
AICPA to find a more efficient and credible way to set accounting 
standards in the private sector. Two xAICPA committees — the Com- 
mittee on Accounting Procedure and the Accounting Principles 
Board — had failed over a period of 35 years to resolve major account- 
ing issues and establish meaningful accounting standards. 

The Wheat study group issued its report, titled "Establishing Finan- 
cial Accounting Standards," in March, 1972. The report recommended 
establishment of the Financial Accounting Standards Board, and its 
recommendations were followed by the AICPA in conjunction with 
other interest groups. The operation and organization of the FASB 
is described beginning on page 130 of this study. 



119 

The AICPA formed another similar group to analyze and recom- 
mend what the objectives of financial statements should be. That group 
issued its report, titled "Objectives of Financial Statements," in Octo- 
ber, 1973. The broad policv objectives of that group are being studied 
further by the FASB. 

THE COHEN COMMISSION 

The most recent study group formed by the AICPA is the Commis- 
sion on Auditors' Responsibilities. The task of this group is to examine 
the entire social framework within which accountants operate, and to 
recommend solutions to problems perceived by AICPA members. This 
group has former SEC Chairman Manuel F. Cohen as its chairman. 
The Cohen commission has been pursuing its objectives for over 18 
months and still has a significant amount of work to do. 

Like the previous AICPA study groups, the Cohen commission is 
comprised entirely of representatives from large accounting firms, 
large law firms, large investment firms, large corporations, and acad- 
emic accountants, some of whom have ties to the "Big Eight" account- 
ing firms. The AICPA is financing the entire study. Unlike the other 
commissions, however, the word "independent" has been specifically 
included by the AICPA in its description of the Cohen commission. 
That may be an attempt to bolster the credibility of the commission, 
but the designation chosen bv the AICPA does not alter the fact that 
the Cohen commission has been selected and is entirely financed by 
the AICPA. just like any other AICPA committee. Almost $1 million 
in expenditures is projected. 

Some indications of the direction being taken by the Cohen com- 
mission can be found in the AICPA's description of its work and a 
recent speech by its chairman.* 

The AICPA's description of the Cohen commission includes the text 
of the charge given to it by the AICPA's board of directors when the 
commission was established. The charge states that the Cohen com- 
mission is to develop recommendations regarding the "appropriate 
responsibilities" of independent auditors and what the public should 
"reasonably" expect them to accomplish. There is also an admonition 
that the commission should recognize the "constraints" placed on in- 
dependent auditors, and that proper responsibilities of auditors should 
not be confused with proper results. 

In his address to the AICPA on the tentative findings of the com- 
mission. Chairman Cohen stated that its final conclusions will be 
"consistent with a realistic conception of the independent auditor's 
role in society." He noted the "widespread misunderstanding" which 
has resulted because the public and the courts have accepted at face 
value the assertion in the independent auditor's certification statement 
that financial statements "present fairly" the results of corporate 
activities. He also provided assurance to the AICPA of final recom- 
mendations which will clearly convey that financial statements are 
actually representations of a client's management, and that distinc- 
tions must be drawn between the independent auditor's responsibility 

* The AICPA's description of the purpose, organization, membership and financing of 
the Cohen commission appears in Appendix E. p. 017. Chairman Cohen's recent address to 

the council of the AICPA. concerning the progress of the study on auditors' responsi- 
bilities, appears in Appendix E. p. 1020. 



120 

for detecting illegal acts and his responsibility for disclosing illegal 
acts. 

Some of the questions posed by the AICPA for solution by the 
Cohen commission seem to indicate the answer which should be given. 
For example : "Should the auditor's standard report, particularly the 
phrase 'present fairly,' be changed to express better the responsibilities 
of auditors?" or "What should the profession do to reduce the risks of 
misunderstanding about its role?" 

The impact of those questions has been recognized by Chairman 
Cohen. He has told the AICPA of "disturbing evidence" that many 
investors view the auditor's report as a "Good Housekeeping Seal of 
Approval." The Cohen commission plans to find better ways to com- 
municate to the public what should be expected from independent 
auditors in relation to the costs and benefits of audits. The chairman 
also notes that the work of the commission will be expedited because 
of the additional manpower being generously provided by four of the 
"Big Eight" firms: Arthur Andersen & Co., Arthur Young & Co., 
Coopers & Lybrand, and Peat, Marwick, Mitchell & Co. 

In keeping with the AICPA's approach toward areas where account- 
ants have failed to meet the expectations of the courts, the SEC, Con- 
gress, and the general public, the Cohen commission appears to be 
analyzing ways to lower the expectations of those who rely upon the 
accounting profession for verification of information. Rather than 
upgrading accounting practices to meet the real public needs for in- 
dependent verification of financial information, the AICPA efforts are 
directed toward re-orienting everyone who uses information certified 
by accountants. If accountants cannot or will not perform the function 
of meaningful independent certification, there are questions as to who 
will perform that necessary service, and what value, if any, there is to 
society from the money it spends on the limited-responsibility audits 
envisioned by the AICPA. 

Accounting Research Association 

The Accounting Research Association is an AICPA organization 
which channels money from the AICPA and major accounting firms 
to the AICPA-controlled Financial Accounting Foundation (FAF) 
for supporting the operations of the Financial Accounting Standards 
Board (FASB). The Accounting Research Association has pledged 
to raise at least $2 million annually as the accounting profession's share 
of the funds needed to operate the FASB. Contributions to the Ac- 
counting Research Association and the FAF are tax deductible, so the 
taxpayer partially subsidizes the FASB. 

A description of the Accounting Research Association has been pre- 
pared by the AICPA at the request of this subcommittee. (See Appen- 
dix E, page 877.) A copy of a financial solicitation letter and ac- 
companying brochures from the Accounting Research Association is 
also contained in Appendix E, at page 1035. 

Although substantial, the $2 million annual pledge by the Account- 
ing Research Association has been successfully met so far. According 
to the sliding scale for dues, the "Big Eight" contribute $200,000 each, 
for a total of $1.6 million or 80 percent of the $2 million annual pledge. 
Most of the remaining $400,000 is contributed by other large account- 



121 

ing firms. A detailed list of contributors has been prepared by the 
FASB. (See Appendix H, page 1233.) 

Thus, the "Big Eight'' and other large firms not only control the 
activities of the AICPA through domination of its committees and 
power structure, but also directly finance the FASB by providing the 
bulk of the accounting profession's contributions. Their financial in- 
fluence is in addition to the influence they exercise over the selection of 
FASB members through AICPA control over the FAF. The organiza- 
tion and financing of the FAF and FASB are described fully begin- 
ning on page 130 of this study. 

FASB Advocate 

The AICPA advocates its views on accounting issues before the 
FASB. A recent example is the AICPA's comments on "materiality" 
as reported in the June. 1976 issue of the AICPA's Journal of 
Accountancy : 

ASD TASK FORCE COMMENTS ON FASB's MATERIALITY PROPOSAL 

In a letter to the Financial Accounting Standards Board, the 
Institute's accounting standards division task force on materiality 
said it believes that an FASB Statement establishing materiality 
criteria should be issued at this time. But the ASD task force 
added that such a Statement would, perhaps, need to be recon- 
sidered upon issuance of a Statement on the objectives of financial 
statements. 

The division's letter offered its views on the FASB discussion 
memorandum, "Criteria for Determining Materiality" (issued in 
March 1975). Among the division's more specific conclusions are: 

The Statement should be developed from the viewpoint of the 
preparers of financial statements and should guide them to more 
consistent materiality decisions. 

Materiality criteria should be based on the magnitude or finan- 
cial effect of the matter and should be viewed in relative amounts. 
An absolute amount cannot be considered material unless its rela- 
tive effect is known. 

Quantitative criteria should be established and should be based 
on the assumption that an amount equal to five percent or more of 
key financial statement captions (i.e.. "current assets." "income 
from continuing operations," etc.) may reasonably be presumed 
to be material. 

There should be a presumption (which could be overcome in 
individual cases) that an item is material if the quantitative 
criteria are met. 

It is not feasible to formulate quantitative materiality criteria 
based solely on earnings trends. 

The AICPA's relative standard for measuring materiality permits 
large companies to spend substantial amounts of money without being 
required to disclose how such sums are spent. Substantial amounts 
which may be immaterial to large companies can be material for small 
companies and must be disclosed. 



122 

Management Advisory Services 

The AICPA has encouraged accountants to perform a full range 
of non-accounting management advisory services. To guide account- 
ants in providing management advisory services, the AICPA has 
issued a series of statements on management advisory services which 
may be obtained from the AICPA in booklet form. (See Appendix 
E, page 1041, for pertinent excerpts.) 

Accounting firms that do not provide extensive management ad- 
visory services are encouraged to refer potential clients to accounting 
firms that do. The "Big Eight" average 11 percent of their gross 
revenues from performing such services, and they control the 
AICPA's committee which formulates AICPA policies on providing 
management advisory services. 

Periodicals and Publications 

The AICPA's Journal of Accountancy is one of the most prominent 
periodicals in the field of accounting. The CPA Letter, also published 
by the AICPA, provides current information on a wide variety of 
topics related to the interests of accountants. 

The AICPA is a major publisher of technical accounting literature 
which is useful to practicing accountants and in continuing pro- 
fessional education courses. A booklet entitled "AICPA Publications 
and Self-Stud}' Materials" describes the various publications, and may 
be obtained from the AICPA. 

A more complete description of the periodicals published by the 
AICPA is included as exhibit four of the AICPA's response to this 
subcommittee. (See Appendix E, page 903.) 

Uniform CPA Examination 

The activities of the AICPA extend even to the preparation and 
grading of the examination which determines who shall be licensed 
to practice as a CPA. The Uniform CPA Examination prepared by 
the AICPA is used to test CPA applicants in all 50 States, as well as 
Guam, Puerto Rico, the Virgin Islands, and the District of Columbia. 
Thus, the AICPA touches the livelihoods of all accountants who are 
or seek to become CPAs, whether or not they belong to the AICPA. 

The AICPA description of its role in developing and administering 
the Uniform CPA Examination appears in Appendix E, page 900. 

National Association of State Boards of Accountancy 

The National Association of State Boards of Accountancy 
(XASBA) is an organization which claims to represent the views and 
interests of the State boards of accountancy that regulate the account- 
ing profession. This organization is separate from the AICPA, but 
the relationship between XASBA and the AICPA is so close that it 
provides another example of the AICPA's extensive influence over the 
regulation of accountants. 

This subcommittee requested certain information from XASBA re- 
garding its activities and financing. XASBA's response is included in 
Appendix F at page 1109. 



123 

The information submitted by NASBA portrays an extraordinary 
situation involving conflicts of interest in its financing. The manner in 
which it is organized also raises questions concerning the actual inter- 
ests represented by XASBA. The apparent independence of state reg- 
ulatory boards is diminished by their association with XASBA. 

The various State boards of accountancy are created by State law to 
qualify accountants for practice and to regulate their conduct. State 
boards of accountancy have the sole legal authority to issue licenses to 
practice accounting, and to recommend revocation or suspension of such 
licenses where there is an infraction of applicable rules. Revocation or 
suspension of a license by a State board could prevent a CPA from 
acting as an independent auditor. 

Because they exercise State authority in regulating the accounting 
profession, State boards of accountancy should be independent of un- 
due influence by the accountants they regulate. Procedures to ensure 
independence of State boards are especially important since members 
of such boards are generally practicing accountants. 

As pait of its response, XASBA provided this subcommittee with its 
1975 financial statements and a list of the contributors to its financial 
support. (See Appendix F, pages 1137 and 1145.) The financial state- 
ments show that voluntary contributions are a vital source of financing 
for XASBA. Excluding conference registration fees that are essenti- 
ally spent on the meetings for which they are charged. XASBA de- 
pends on voluntary contributions for 60 to 70 percent of its annual 
revenues. 

Approximately 80 percent of the voluntary contributions received 
each year for XASBA's support comes from the "Big Eight" account- 
ing firms. The list of voluntary contributors submitted by XASBA 
in Appendix F at page 1145 shows that each of the "Big Eight" firms 
contributes $5,000 annually, for a total of $40,000. 

This subcommittee has arranged the data on contributors submitted 
by XASBA to identify those contributing more than $1,000 annually. 
(See Appendix F. p. 1148.) The table developed by this subcommittee 
clearly demonstrates that the bulk of the funds used to finance 
XASBA's daily activities is contributed by the "Big Eight" and a 
few other large national accounting firms. About 85 percent of the 
$50,710 contributed to XASBA in 1975 came from the big national 
accounting firms. 

The result of XASBA's dependence on the generosity of the big 
national accounting firms is to have the national organization which 
purports to represent State boards of accountancy largely financed 
by influential accounting firms that the State boards regulate. It is 
an obvious conflict of interest when regulated accountants finance 
the national organization of their State regulatory authorities. The 
public and those accountants who do not contribute to XASBA can- 
not be expected to have complete confidence in the independence and 
objectivity of the State boards of accountancy participating in 
XASBA under such conditions. 

XASBA has recognized the impropriety of having its activities 
financed by gifts from regulated accountants and big accounting 
firms. While it has continued to accept such gifts on a "temporary" 
basis, XASBA commissioned a study which recommended selling 
its services as one method of raising revenues. In accordance with 



67-159 O - 77 - 10 



124 

that recommendation, NASBA's board of directors and the AICPA's 
board of directors agreed in October, 1975 that NASBA will be en- 
gaged by the AICPA on a fee basis to conduct an on-going audit of 
the uniform CPA examination process. 

The AICPA prepares and grades the Uniform CPA Examination, 
which is used by all State boards of accountancy to evaluate the qualifi- 
cations of applicants for CPA licenses. The new audit arrangement 
between NASBA and the AICPA will have the national organiza- 
tion of the State boards selling its services to the Nation's largest 
CPA lobbying organization. Although no audit fees have been ac- 
cepted yet, NASBA expects that fees received from the AICPA will 
approximate $60,000 from the first year of auditing services. 

AICPA members in public practice are regulated by State boards 
of accountancy, and the big national accounting firms control the 
AICPA. Apparently, NASBA believes that it is more proper to sell 
services to a lobbying organization for regulated accountants than to 
accept outright gifts from accounting firms. Both methods of raising 
revenues involve conflicts of interest between State regulators and 
regulated accountants. 

There are serious legal and ethical questions concerning the pro- 
priety of State regulatory authorities joining together through 
NASBA to sell services to an organization of regulated accountants. 
NASBA's financial dependence upon regulated accountants is pre- 
served under its audit arrangement with the AICPA. Reviewing the 
adequacy of examinations used to license CPAs should be part of the 
official duties of State boards of accountancy, especially when such 
examinations are prepared and graded by a professional lobbying 
organization whose members are regulated by the State boards. It 
is improper to have the AICPA pay NASBA for performing duties 
which are part of the official responsibilities of State boards. 

NASBA's close relationship with the AICPA raises questions in 
other respects. The current president of NASBA is not even a mem- 
ber of a State board of accountancy. He is a former State board 
member, and a retired partner of one of the "Big Eight" accounting 
firms. The executive director of NASBA is a former AICPA em- 
ployee. The AICPA furnishes free office space and other office serv- 
ices to NASBA at the AICPA's headquarters in New York City. 
In view of the AICPA's partisan lobbying activities on controversial 
accounting issues. NASBA's close association with the AICPA creates 
doubt about the independence of State boards of accountancy which 
participate in NASBA activities. 

NASBA adopted new bylaws on 10 October, 1975 in an effort to 
change its organizational structure so that NASBA could more 
clearly represent the views of the State boards of accountancy. How- 
ever, the new bylaws permit former members of State boards to be- 
come "associate" members of NASBA. The "associate" members have 
full rights to participate in the NASBA organization as officers, di- 
rectors, and committee members, even though they have probably 
returned to the active practice 1 of accounting and no longer have 
official State board responsibilities. 

The only limit at ions on the participation of "associate" members in 
NASBA's organization are some requirements that a majority of its 
board of directors and certain important positions be filled with active 



125 

State board members. Those limitations are circumvented by the quo- 
rum provisions in the NASBA bylaws which make it possible for 
"associate'' members to form a working majority. The bylaws do not 
guarantee that actions taken by NASBA represent solely the views of 
active State board members. 

Its close relationship with XASBA is one means by which the 
AICPA is able to extend its influence to State boards of accountancy 
which regulate CPAs. Undoubtedly, many active State board mem- 
bers are also members of the AICPA, which is directly involved in 
influencing the activities of State boards of accountancy. 

Professional Ethics Enforcement 

All CPAs are required to adhere to a professional code of ethics 
when performing CPA services. Violations of ethical standards can 
lead to disciplinary actions by state licensing authorities and possible 
revocation of the license to practice as a CPA. As in every other sig- 
nificant area of accounting, the AICPA has taken the lead in develop- 
ing a code of ethics to determine the manner in which accountants may 
practice. 

Control over the determination of professional ethics is important 
because ethics guidelines define the types of services accountants may 
properly perform, and the relationships with clients that accountants 
may properly establish. For example, the AICPA-developed code of 
ethics permits accountants to perform non-accounting management 
advisory services without being deemed to have lost their professional 
independence from a client's management. 

Standards of ethics also restrict advertising by accountants, and 
thus tend to restrict the development of competitive pricing and per- 
formance of accounting services. 

The AICPA has prepared a description of its ethics enforcement 
apparatus and the results over the last five years as part of its response 
to this subcommittee. (See Appendix E, paq-e 879.) Meaningful anal- 
ysis of the success and quality of the AICPA's ethics enforcement 
program is difficult because of the many instances where the AICPA 
does not identify offenders. 

A review of the ethics violators and their offenses reveals that there 
is no consistent relationship between the type of offense and the dis- 
ciplinary action rendered by the AICPA. The restrictions on AICPA 
ethics enforcement activities have been previously discussed in the 
section of this studv dealing with the organization of the AICPA. 
(See page 82.) 

The ethics enforcement activities of the AICPA received some recent 
publicity when the AICPA found that former Secretary of Commerce 
Maurice II. Stans did not bring disci-edit to the accounting profession 
when he pleaded guilty to certain offenses relating to the Watergate 
scandal. Mr. Stans is a former president of the AICPA. a recipient 
of its highest honor award, and the former senior partner of Alexander 
Grant & Co., one of the 15 largest accounting firms. As a former 
AICPA president. Mr. Stans continues to hold a seat on the council 
of the AICPA. 

A series of articles describing the reported efforts of Mr. Stans to 
obtain campaisri contributions from the c> Pig Eight" accounting firms. 



126 

and the recent AICPA finding that cleared Mr. Stans of unethical con- 
duct charges is included in Appendix E, at page 1050. 

Another example of the AICPA's ethics enforcement program is 
its failure to take any action against partners of Peat, Marwick. 
Mitchell & Co. after that u Big Eight" firm was disciplined by the SEC. 
In Accounting Series Release 173, the SEC cited Peat, Marwick. 
Mitchell & Co. for improper auditing in five separate cases. (See Ap- 
pendix C, page 736.) The AICPA made no attempt to discipline any 
of the individuals responsible for the improper acts by Peat, Mar- 
wick, Mitchell & Co., other than to terminate the AICPA member- 
ship of a few individuals who were convicted by the courts for their 
criminal conduct. The standard of ethics followed by the AICPA for 
partners of large national accounting firms appears to be that discipli- 
nary action for ethics violations must be predicated upon a final ver- 
dict of guilty in a court of law. 

Self-regulation of professional groups through codes of ethics theo- 
retically supplants the need for legal standards of conduct by establish- 
ing higher standards of behavior than the law would impose. Such 
higher standards of conduct are thought necessary because a profes- 
sional performs in a capacity which requires the utmost public confi- 
dence in his ability to serve the public interest. Public reliance upon 
the professional's reputation for making judgments on sensitive and 
important matters is based upon a belief that professional groups 
follow stringent procedures and demanding standards of conduct. 

The Federal Government, business and the public are constantly 
encouraged by the AICPA to rely more and more on the expertise, 
dedication and professional reputation of CPAs. While promoting the 
value of professional CPA services, however, the AICPA is simul- 
taneously seeking legislation, administrative rulings, and court deci- 
sions that will reduce the legal responsibilities of CPAs. In several 
areas, such as reporting illegal acts, establishing an ''accountant-cli- 
ent" privilege, and limiting the damages which may be recovered 
from errant accountants, the AICPA is actually attempting to reduce 
the legal responsibilities of CPAs below what is expected from ordi- 
nary citizens. The contradictory stance of promoting professional 
privileges while opposing enforcement of associated professional 
responsibilities is prevalent in AICPA statements and activities. 

The results of the AICPA's activities regarding professional ethics 
and acceptable practice standards are detrimental to the vast majority 
of CPAs who perform their services with competence, care and pride. 
By seeking lower standards for all accountants in order to defend the 
few who are negligent or incompetent, the AICPA contributes to the 
erosion of public confidence in the usefulness of accounting services. 

Public Spokesman 

As described previously (page 102), the AICPA spends substantial 
amounts to influence the Federal Government, the general public and 
special interest groups. The AICPA bylaws provide that the chairman 
of the board of directors and the full-time, salaried president are the 
official spokesmen for the AICPA. In addition, the AICPA committee 
structure continually develops and communicates policies and recom- 
mendations on specific topics. 



127 

The AICPA communicates its views in many ways, but the AICPA's 
annual report and speeches by the designated official spokesmen are 
two easily recognized methods of public communication. The joint 
statement of the chairman of the board and the president, at the front 
of the fiscal 1975 annual report, provides their views on the AICPA's 
activities during the year. They "state that CPAs are undertaking many 
projects to cope with their changing environment, concluding, "It is 
this willingness to come to grips with public expectations that pro- 
vides assurance of our profession's ability for self -renewal." 

The president o,f the AICPA, in his 23 March, 1976 speech before 
the Los Angeles Chapter of the California Society of CPAs, described 
the private sector's failure to set satisfactory accounting and disclo- 
sure standards during the past ±0 years. (See Appendix E, page 1055.) 
He concluded with a recommendation for a new approach. The fact 
that the AICPA has controlled the standard-setting mechanism for 
all those years and might therefore be responsible for the failure to 
achieve effective standards was not directly addressed by the 
AICPA's president. However, he recognized throughout his speech 
that an acceptable system of accounting standards has never been 
developed. 

Even though the AICPA's role in that failure was described rather 
than discussed, and hope was expressed for the future, it is still 
remarkable that the president of the AICPA would make the follow- 
ing statement : 

In the private sector, business has gone through a series 
of damaging trends and events. In the 1960's there were the 
go-go managers who parlayed small companies into giant 
conglomerates through accounting manipulations that ulti- 
mately resulted in the bilking of hordes of small investors. 
These were accompanied by the spectacular collapse of a 
number of prominent companies whose securities were 
thought to be outstanding investments. The demise of such 
companies as Penn Central and Equity Funding has taken 
a toll in public confidence that may never be fully restored. 

It is indicative of the AICPA's ability to note effects without men- 
tioning causes that its president would admit the failures which have 
occurred without mentioning the dominant role played by the AICPA 
and the large accounting firms. The "accounting manipulations" used 
by go-go managers to bilk investors were permitted by large, re- 
spected accounting firms applying their concepts of generally accepted 
accounting principles. The AICPA's standard-setting apparatus was 
either unable or unwilling to prevent the use of misleading accounting 
procedures to create non-existent "earnings." 

"Big Eight" firms were involved in both failures he mentioned. 
Through Accounting Series Release 173. the SEC has published a 
settlement agreement with Peat. Marwick, Mitchell & Co. which criti- 
cizes that firm's approval of misleading accounting principles by 
Penn Central's management. (See Appendix C, page 757.) The 
trustee in bankruptcy for Equity Funding has found that Haskins £ 
Sells "must share significant responsibility for the persistence of the 
fraud at Equity Funding." (See Appendix C. page 721.) 

The AICPA's president also noted his agreement with efforts to 
replace accounting based on known historical costs with accounting 



128 

based on estimated inflation values. He mentioned the possibility of 
using such inflation accounting for the purpose of computing busi- 
ness taxes. Adoption of inflation accounting would reduce the taxes 
paid by businesses. 

Another concern expressed in his speech was the trend towards re- 
quiring greater disclosure by publicly-owned corporations : 

We are in the midst of a period of proliferating disclosure 
requirements and have reached a point where the footnotes 
in many cases overshadow the financial statements. There 
is widespread concern that an overload of disclosure may 
be counter-productive to understanding and that the bene- 
fits may not be worth the costs involved. 

He then described the problems of disclosure with a series of 
questions : 

Where are we going with this insatiable demand for more 
and more information? Is it all really necessary? Who uses 
it and how and to what effect? Are the traditional rights 
to privacy going to be obliterated in the name of the public's 
need to know ? Is the SEC's theory of differential disclosure 
valid or is it a rationalization of outmoded assumptions ? Are 
we attempting to remove more risk from investment decisions 
than we can or should ? If management and securities market 
fraud is our principal concern are there more effective ways 
than disclosure to deal with the problem? 

The president of the AICPA recommended that one possible alter- 
native would be to replace many of the factual disclosures by cor- 
porations with an analysis of the present condition and future pros- 
pects of a business: "It is not very satisfactory to give users of 
financial reports a lot of financial data and tell them to make their 
own analysis and interpretation," he said, "What they need is to be 
told what the financial data means in terms of the operations, finan- 
cial condition and future prospects of the business." 

In his view, the managements of businesses should be the ones to 
explain to investors and others how things are going. Auditors would 
be required to review and report on the reasonableness of manage- 
ment's analysis and interpretation. Until such a better reporting sys- 
tem is in effect, he concluded, "We shall carry our lighted lantern 
before us seeking fairness while standing waist deep in a swamp of 
disclosures at the height of the rainy season." 

In view of the poor record by corporate managements and large ac- 
counting firms in reporting the many corporate abuses which have 
been revealed during the past few years, many persons might not agree 
with his alternative to meaningful factual disclosure. The creative 
manner in which factual data are currently presented in accordance 
with generally accepted accounting principles might cause a reluctance 
to rely solely on management analyses and interpretations without 
supporting factual data. The potential conflicts of interest in the pro- 
posed alternative would be too great for many to accept. 

Despite the concern of the AICPA's president, the factual disclo- 
sures which have been required or proposed are minimal in comparison 
with the information which is necessary to evaluate properly the opera- 



129 

tions of a business. The abuses which have occurred have resulted from 
too little information as to the true state of affairs rather than too 
much information that confused investors and others. Proper dis- 
closure may not reduce economic risks associated with investing, but 
it will reduce unnecessary investment risks resulting from misleading 
or omitted information. 

Investors, government officials and the public are capable of making 
their own decisions regarding the content of information if it is dis- 
closed in a meaningful and uniform manner. Problems have not 
resulted from the quantity of disclosure, but from the quality of 
disclosure. 

Summary 

Under the domination of the "Big Eight" accounting firms, the 
AICPA engages in extensive political, research, administrative, and 
educational activities which greatly influence accounting practices 
recognized by Federal and State governmental authorities. Some of 
the AICPA's activities are proper, while others are highly question- 
able. The AICPA has taken contradictory positions on several im- 
portant issues. 

The AICPA has developed prestige because of its size, resources, 
and the professional reputation of CPAs for objectivity, which has 
been accepted by the public and governmental authorities until recent 
years. Analysis of AICPA activities reveals that the organization 
primarily promotes the perceived interests of the large national ac- 
counting firms. Those interests are generally sympathetic to the man- 
agement interests of large corporate clients which are the primary 
source of revenues for large accounting firms. Although there is a 
divergence of interests between large and small accounting firms based 
on their different styles of practice, no example has been found where 
the AICPA has promoted the interests of small accounting firms at 
the expense of the large national firms. 

When evaluating the activities of the AICPA, the dominance of 
the "Big Eight" firms and the identities and affiliations of partici- 
pating members must constantly be recognized. Their influence ex- 
tends throughout society because of the importance of accounting 
practices to decision-making by business, government, unions, 
churches, pension funds and individuals in a complex economy where 
most information is received from third parties. 



CHAPTER V. THE FINANCIAL ACCOUNTING STANDARDS 
BOARD (FASB) AND RELATED ORGANIZATION 

Introduction 

The Financial Accounting Standards Board (FASB) is an organi- 
zation established by certain influential business, accounting, and fi- 
nancial groups to determine and interpret accounting standards for use 
in preparing financial reports of businesses. Such standards and inter- 
pretations promulgated by the FASB are used for all types of finan- 
cial reporting purposes. Their primary impact derives from the re- 
quirement that they be used in preparing corporate financial reports 
under the provisions of the Federal securities laws. Accurate and com- 
prehensive information on the operations of publicly-owned corpora- 
tions is essential to the proper determination of important economic 
and social questions. 

The FASB and its private sponsors emphasize that it is an "inde- 
pendent'' body when describing its purpose and activities, but the 
FASB is not independent of its sponsoring groups. The manner in 
which the FASB is organized and operated ensures that it will be 
responsive to the private interests of the groups that have created 
it. Continual use of the term "independent" in descriptions of the 
FASB does not alter the substance of its organization and financing 
which determine its purely private and dependent nature. 

The notable factor which distinguishes the FASB from other well- 
financed prh^ate study groups is the unusual system which has evolved 
for setting accounting standards. A remarkable coalition of private 
interests, Federal agencies, and State regulatory authorities have 
agreed that accounting standards affecting the public interest should 
be set within the private sector. The result is that important public 
policies relating to accounting standards are determined by private 
groups with substantial vested interests in the outcome of the policy 
decisions. 

It is not within the scope of this study to provide a detailed 
history of the manner in which the setting of accounting standards has 
evolved. That task has already been accomplished through the recent 
publication of a well-researched and perceptive book entitled "Cor- 
porate Financial Reporting — Public or Private Control ?" by Pro- 
fessor Robert Cliatov of the School of Management, State University 
of New York at Buffalo. 1 The purpose of this analysis is to describe 
the existing framework for setting financial accounting practices rec- 
ognized by Federal agencies. 

Some understanding of the reasons for creating the FASB is nec- 
essary, however, to evaluate properly its operation and functions. As 
part of its response to questions from this subcommittee, the FASB 
has provided its own description of its creation in the sections titled 



iChatov. Robert: Corporate Financial Reporting — Public or Private Control? The Free 
Press. A division of Macmillan Publishing Co., Inc.: 866 Third Avenue. New York, N.Y. 
10022 (107" 

(130) 



131 

"Description of the Organization," and "Exhibit 4." (See Appendix 
H. pages 1224. and 1266.) 

Evolution or Standard- Setting 

Prior to the enactment of the Securities Act of 1933 and the Securi- 
ties Exchange Act of 1934, accounting standards were developed and 
applied by businesses with the aid of the accounting profession. Be- 
cause of abuses which occurred under that system, Congress enacted 
the Federal securities laws to protect the public and provide accurate 
information on publicly-owned corporations. 

The Securities and Exchange Commission (SEC) was created by 
Congress to administer the Federal securities laws for the benefit of 
the public. It was given broad authority to determine accounting 
standards, procedures, and forms for publicly-owned corporations be- 
cause sound accounting techniques are a necessary part of presenting 
financial information meaningfully. For various reasons relating to 
its status then as a new agency and its preoccupation with other mat- 
ters, the five-member SEC decided by one vote to allow the develop- 
ment of accounting standards to remain in the private sector. 

The congressional mandate expressed in the Federal securities laws 
was that financial and other information required to be disclosed by 
publicly-owned corporations should not be misleading. In an attempt 
to achieve that goal without involving the SEC in a comprehensive 
effort to develop and promulgate responsive accounting standards, the 
majority of SEC commissioners decided to require "substantial au- 
thoritative support" for accounting standards used in reporting fi- 
nancial information under the Federal securities laws. That policy 
was implemented by the SEC through issuance of Accounting Series 
Release Xo. 4 (ASR 4) in 1938. (See Appendix I. page 1432.) 

ASR 4 stated that information filed with the SEC must be prepared 
in accordance with accounting standards for which there is substantial 
authoritative support, or else the information filed would be presumed 
to be misleading in violation of the Federal securities laws. Because 
of the legal remedies permitted against persons filing misleading in- 
formation with the SEC, ASR 4 had the practical effect of forcing 
publicly-owned corporations to justify their accounting standards. 
Accountants also became involved in the justification process due to 
the legal liability incurred by independent accountants in certifying 
the validity of corporate financial information filed with the SEC. 
The SEC also adopted a policy of footnote disclosure for cases 
where there is a difference of opinion between the SEC and a reporting 
corporation as to the proper accounting standards to be followed. The 
SEC decided that when there is substantial authoritative support for 
using alternative accounting methods to report the same business 
transaction, a publicly-owned corporation would be permitted to use 
the accounting method it prefers, while footnoting the effect of the 
method preferred by the SEC. This disclosure in lieu of correction 
policy means that the SEC does not insist on correction of financial 
statements which it believes are misleading, as long as accounting 
methods having substantial authoritative support are used in pre- 
paring the statements. 

Because the SEC had decided— albeit by the tilt of a single vote- 
not to use its broad authority to set comprehensive and meaningful 



132 

accounting standards for publicly-owned corporations, the private 
sector was free to continue developing and applying accounting stand- 
ards which served the purposes of corporate managements. The only 
significant factor remaining to protect the public interest was the 
mandate of the Federal securities laws that financial information 
should not be misleading. 

The activities of the SEC regarding its accounting responsibilities 
are described further in the section of this study dealing specifi- 
cally with the SEC. (See page 173.) Examples of misleading and 
abusive accounting practices which have been developed in the private 
sector under the accounting policies established by the SEC are also 
described in this study. (See page 188.) 

In accordance with the SEC's accounting policies, managements 
of publicly-owned corporations and their auditors were able to develop 
and apply a body of alternative accounting standards which would be 
useful primarily in promoting their business objectives, rather than 
focusing on standards which would result in meaningful and uniform 
presentation of financial information to the public. The only condition 
was that accounting standards must be justified by substantial au- 
thoritative support, which would need to be developed within the 
private sector. The question was who in the private sector could pro- 
vide suitable support for accounting standards designed mainly to 
promote corporate business interests. 

The accounting profession filled the need for establishing a source 
of authority within the private sector to approve accounting stand- 
ards. The AICPA, named the American Institute of Accountants at 
that time, designated a committee to provide an apparatus for giving 
consideration and formal approval to privately developed accounting 
standards. Formed in 1938, the Committee on Accounting Procedure 
had 22 members serving voluntarily on a part-time basis with a very 
small full-time research staff. 

The Committee on Accounting Procedure was the first organized 
attempt to establish generally accepted accounting principles (GAAP) 
which would be acceptable to the SEC because of their "substantial 
authoritative support." This support would result from the AICPA's 
formalized approval process and the wide usage of AICPA-approved 
accounting standards by publicly-owned corporations that were clients 
of AICPA members. The Committee on Accounting Procedure issued 
its standards in the form of accounting research bulletins. A total of 51 
such bulletins were issued during the 20-year life of the Committee on 
Accounting Procedure. 

The Committee on Accounting Procedure was replaced in 1959 as 
the primary source of substantial authoritative support within the pri- 
vate sector. In its place, the AICPA established another committee of 
part-time volunteers to establish accounting standards in a manner 
which would satisfy the SEC's requirement for substantial authorita- 
tive support. The new AICPA committee was called the Accounting 
Principles Board. It was comprised of 18 members, including repre- 
sentation from small accounting firms and academic accountants as 
well as large firms, plus a small full-time staff. 

The Accounting Principles Board issued 31 opinions on accounting 
standards before its demise in 1973. Because of its failure to set ac- 
rounting standards for business combinations that would put a stop 



133 

to the accounting abuses being practiced in conglomerate acquisitions 
during the late 1960's, as well as its failure to resolve other account- 
ing issues, the Accounting Principles Board was criticized by the SEC 
and the financial community for its inability to respond to important 
accounting problems. To counter such criticism, the AICPA con- 
ducted a special study on the establishment of accounting standards. 

The AICPA study group was comprised of seven influential per- 
sons from the accounting and financial communities, and was com- 
monly known as the Wheat study group after its chairman, former 
SEC Commissioner Francis M. Wheat. The Wheat study group was 
appointed in March, 1971 and issued its report, "Establishing Finan- 
cial Accounting Standards," to the AICPA's board of directors in 
March, 1972. The board of directors approved the findings and recom- 
mendations of the Wheat study group, which were ultimately adopted 
by the council of the AICPA. 

The Wheat study group recommended that accounting standards 
should be set within the private sector by a Financial Accounting 
Standards Board (FASB) with seven full-time, salaried members. 
The FASB would be advised by a Financial Accounting Standards 
Advisory Council (FASAC), and both the FASB and the FASAC 
would be appointed and financed by a Financial Accounting Founda- 
tion (FAF). The present system for setting accounting standards 
within the private sector is a direct result of the Wheat study group's 
recommendations. 

The current FASB structure for setting accounting standards is 
significantly different from previous AICPA efforts in several respects. 
The first is that the FASB is not a committee of the AICPA. Although 
it is controlled by the AICPA, it is organized and functions separatelv 
from the AICPA. 

Second, the FASB structure provides for participation in the set- 
ting of accounting standards by other influential private interest 
groups. Members of the FASB are not required to belong to the 
AICPA, as were members of previous standard-setting bodies. 

The third difference is that AICPA members are now required to 
use accounting standards established by AICPA-designated bodies, 
rather than looking to them only for guidance. Rule 203 of the 
AICPA's code of ethics designates the FASB as the body for setting 
accounting standards which are binding on members. To the extent 
that they have not been superseded by action of the FASB, standards 
promulgated by the AICPA's Committee on Accounting Procedure 
and Accounting Principles Board are also binding on AICPA 
members. 

Fourth, the FASB has only seven members. The small number is 
intended to facilitate discussion and decision-making. The FASB is 
also* full-time, well-financed, and has a supporting staff of approxi- 
mately 80 persons. Organized procedures for FASB decision-making 
permit exposure drafts, open comment, and public hearings. Finally — 
and most importantly — the FASB has received special recognition by 
the SEC through Accounting Series Release 150. as will be described 
subsequently. 

The FASB has provided abundant information on its organization 
and activities through its annual reports and its response to questions 
from this subcommittee. (See Appendix H. page 1219). While much 



134 

of that information is described and referenced within the text of this 
study, interested persons will find additional data and information 
on FASB activities in the appendix materials. The FASB has also 
prepared a brief description for this subcommittee of the essential 
facts and relationships among the three units of the FASB organiza- 
tional structure. (See Appendix H, page 1224.) 

The SEC's "Substantial Authoritative Support" Test 

The "substantial authoritative support" test adopted by the SEC 
to determine whether accounting standards are misleading is vague. 
There is no precise definition as to what constitutes "substantial author- 
itative support." Although authoritative support may come from 
government regulations, scholarly writings, and other such sources, 
the primary method has been through the establishment of generally 
accepted accounting principles (GAAP), which depends on accept- 
ance as the source of authoritative support. Obviously, problems were 
sure to result from a system which measures the quality of accounting 
standards by the degree of their general acceptance. 

Some severe problems have indeed resulted from the reliance on 
GAAP to provide accounting standards which will ensure that finan- 
cial statements are not misleading. The two major problems are the 
variety of acceptable accounting alternatives which have evolved to 
account for the same business transaction, and the failure of the general 
acceptance criterion to select the accounting .standards which provide 
the most meaningful information to the public. 

Concerning the first problem, Professor Abraham Briloff has de- 
scribed the variety of acceptable accounting alternatives in his recent 
book entitled "More Debits Than Credits". 1 Professor Briloff produced 
the following table showing the number of different accounting 
methods available for use in reporting common business transactions : 

Transaction : Number of Alternatives 

When revenue generally recognized 3 

When revenue recognized for long-term contractors " 2 

Accounting for unfunded pension cost 2 

Accounting for funded pension cost 3 

Charging of real and personal property taxes to income 8 

Treatment of tax versus financial accounting divergencies 3 

Methods of depreciation 4 

Inventory methods 5 

Accounting for discounts 2 

Fixed asset acquisition 4 

Fixed asset construction 3 

Development costs in extractive industries, et cetera 3 

Professor Briloff based his table on a study of acceptable alternative 
accounting practices which was sponsored by the AICPA. In all, the 
study listed 31 separate kinds of business transactions with an aggre- 
gate of 80 different accounting alternatives. Although the various 
accounting methods may lead to financial statements showing com- 
pletely different results from the same set of business transactions, 
publicly-owned corporations are free to choose any method they desire 
from the catalogue of GAAP. 

1 Briloff, Abraham J., "More Debits Than Credits," Harper & Row. New York, N.Y. 
(1976). page 7. 



135 

The second major problem — the failure of the general acceptance 
criterion to select accounting standards that are the most appropriate 
for presenting meaningful financial information to the public — begins 
with the difficulty of identifying the parties among whom GAAP are 
generally accepted. For the most part, they are the large national 
accounting firms which control the AICPA's standard-setting appara- 
tus, and whose major clients are the publicly-owned corporations that 
are affected by GAAP. 

Accounting practices that are readily accepted by corporate man- 
agements and their auditors are not necessarily those acceptable to per- 
sons who must rely completely on the information presented in finan- 
cial statements to evaluate corporate activities. Investors, government 
authorities, the public, and even creditors traditionally have not had 
the opportunity to "generally accept" accounting standards until they 
appear in corporate financial statements under the designation of 
GAAP. 

General acceptance of accounting standards usually means the lowest 
common denominator acceptable to everyone involved in the process 
of acceptance. Unfortunately, the lowest common denominator rarely 
means the most meaningful choice because parties with vested interests 
will object to accounting standards which might clearly show unfavor- 
able operations, mistakes and improprieties. Accounting standards 
most beneficial in providing accurate information to the public on cor- 
porate activities are also bound to encounter stiff opposition from 
those who would be forced to give up the ability to manipulate infor- 
mation to their advantage. 

Organizational Structure 

Four influential accounting and business groups have joined with 
the AICPA in sponsoring the FASB. 1 As sponsors, they are permitted 
to nominate certain of their members for election to positions of power 
within the FASB structure. They are also pledged to help finance 
its operations. 

In addition to the AICPA, the four other groups sponsoring the 
FASB are : 

The American Accounting Association, 

The Financial Analysts Federation, 

The Financial Executives Institute, and 

The National Association of Accountants. 
A description of the memberships and activities of these groups is 
contained in Chapter VII (see p. 158). This subcommittee also 
requested information from each of the groups sponsoring the FASB. 
The responses are contained in Appendix G, p. 1149. 

The FASB is structured so that it is controlled by the AICPA, but 
the other four sponsoring groups are permitted limited participation 
in the FASB decision-making process. It was intended that the par- 
ticipation of other private groups with a strong self-interest in the 
determination of accounting standards would broaden support for 

1 The Securities Industry Association was added as the sixth sponsor of the FASB on 
1 October, 1976. Although added as a sponsoring group too late to be included in this 
studv. the Securities Industry Association reportedly represents the interests of more 
than S00 investment banking firms. Its addition as an FASB sponsor does not significantly 
affect the findings of this study. 



136 

FASB pronouncements. Allowing participation by other private 
interest groups serves the dual purpose of thwarting charges that the 
FASB is merely a committee of the AICPA, while also removing from 
the list of potential FASB critics four of the most influential groups 
within the private sector in regard to accounting matters. 

The procedural rules governing the establishment of accounting 
standards by the FASB provide an opportunity for critical comment 
by interested parties and the public before final adoption of stand- 
ards. Exposure drafts of proposed accounting standards are 
circulated for comment and public hearings are usually held. These 
forms of public participation, however, do not alter the fact that the 
actual decisions on accounting standards are made behind closed doors 
by private parties with a vested interest in the outcome. 
The three units comprising the FASB organization are: 
The Financial Accounting Foundation ( F AF ) , 
The Financial Accounting Standards Board (FASB), and 
The Financial Accounting Standards Advisory Council 
(FASAC). 



137 
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138 

Although administrative authority and funding passes from one 
FASB organizational unit to the next, the private interest groups in 
control of each organizational unit remain the same. In many cases, 
the same influential individuals appear as leaders of the sponsoring 
groups and as members of the organizational units involved in the 
FASB structure. Thus, the real identity of the parties in control of 
the FASB is the same as that of the private sponsoring groups. 

The power to select the members of the FAF, the FASB, and the 
FASAC ultimately resides with the board of directors of the AICPA. 
although the other four sponsoring groups have certain rights to 
nominate some candidates. The money to operate the FASB organiza- 
tion is contributed by all five sponsoring groups, as well as some other 
private groups. 1 The vast majority of the money for the FASB, how- 
ever, is contributed by the members of the AICPA and the Financial 
Executives Institute. 

To separate the FASB from the sponsoring groups on an organiza- 
tional basis, the FASB structure was formed as a non-profit corpora- 
tion. Its structure as a non-profit corporation also serves to make con- 
tributions to the FASB tax-deductible for Federal income tax pur- 
poses. That means the Federal Government is partially subsidizing the 
setting of accounting standards by private groups with vested interests 
in the outcome. 

As will be described in the following sections, the flow of funds and 
power from the sponsoring groups through the FAF to the FASB is 
a separation in appearance only. The relationship between the spon- 
soring groups and the FASB is similar to that between the companies 
in a joint venture. The organizational units are legally separate and 
the transactions between them are recorded as if they were at arms- 
length. But the same parties are in control of all the organizations 
involved in the venture. The FASB can accurately be described as the 
operating subsidiary of the joint venture in setting accounting stand- 
ards undertaken and controlled by the AICPA, the Financial Execu- 
tives Institute, the National Association of Accountants, the American 
Accounting Association, and the Financial Analysts Federation/ 

Financial Accounting Foundation (FAF) 

The Financial Accounting Foundation (FAF) is the non-profit 
corporation organized by the AICPA in conjunction with the other 
four sponsoring groups to operate the FASB. Chart 3 on page 137 
shows that the FAF is the first entity separating the AICPA and the 
other sponsoring groups from direct participation as organizations in 
the setting of accounting standards. This organizational separation 
differentiates the FAF from previous AICPA efforts to set accounting 
standards, and is the basis for the claim that the FASB is "independ- 
ent." Separate organizations, however, do not mean separation from 

1 Contributions in excess of $1,000 to FAF/FASB in 1974 and 1975 from other sources were: 

Amount 



Name 1975 1974 

New York Stock Exchange - $50,000 $50,000 

Liberty Fund. 2,000 

Stanford University 1.000 



139 

the control exercised by the AICPA and the other sponsoring groups. 

The certificate of incorporation and bylaws of the FAF and its 
operating units, the FASB and the FASAC, are included in Appendix 
H at page 1367. They detail the careful manner by which power is 
shared among the five private groups sponsoring the FAF. But the 
ultimate authority to control the FAF — and consequently the FASB — 
is retained by the AICPA 's board of directors. This analysis will focus 
on the provisions of the certificate of incorporation and bylaws which 
serve to guarantee that the FAF will reflect the views of its sponsors. 

The FAF exercises certain basic corporate powers to obtain the 
necessary funds for operations and to select the members of the FASB 
and the FASAC. As described by the FASB in Appendix H at page 
1224, the principal duties of the FAF are : 

1. To appoint the members of the Financial Accounting Stand- 
ards Board. 

2. To appoint the members of the Financial Accounting Stand- 
ards Advisory Council. 

3. To arrange for the financing of the organization. 

4. To prepare and administer the budget of the Financial Ac- 
counting Foundation. 

5. To approve the annual budget of the FASB and the FASAC, 
as prepared and presented by the chairman of the FASB. 

6. To review periodically the bylaws of the FAF, and the basic 
structure for establishing and improving standards of financial 
accounting and reporting. 

The FAF corporate charter provides that the governing body of 
the FAF will be the board of trustees which shall consist of nine 
members. The board of trustees is authorized to exercise all powers 
of the FAF except those that are reserved to the FASB and the 
FASAC in the charter. 

The FAF charter is very specific as to who shall be eligible to serve 
on the board of trustees. The chairman of the board of the AICPA 
is automatically an FAF trustee for the duration of his term, which 
is one year. The remaining eight trustees are elected to three-year terms 
at staggered intervals. Four of the eight elected trustees are to be 
CPAs in public practice at the time of their election; two trustees 
are to be financial executives; one trustee is to be a financial analyst ; 
and one trustee is to be an accounting educator. 

The mandate of the charter as to the qualifications and proportion- 
ate representation of the trustees is amplified in the FAF bylaws. 
Not just any CPA, financial executive, financial analyst, or account- 
ing educator may apply for membership on the FAF board of 
trustees. 

As provided in the FAF bylaws, the four trustees who are to be 
practicing CPAs are also required to be AICPA members. That re- 
quirement is probably not necessary since the AICPA 's board of di- 
rectors is designated to nominate those four trustees. The FAF by- 
laws also reouire that the two trustees who are to be financial execu- 
tives shall be nominated, one each, by the Financial Executives 
Institute and the National Association of Accountants. The American 
Accounting Association is designated to nominate the FAF trustee 
who is an accounting educator, and the bylaws state that the Financial 



67-159 O - 77 - 11 



140 

Analysts Federation shall nominate the trustee who is a financial 
analyst. 

Thus, all nine FAF trustees are from the five sponsoring groups, 
except in the unlikely event that one of the sponsors should nominate 
someone from outside its own membership. 

This exclusionary nominating process is written into the bylaws to 
ensure that FAF trustees represent the views of the sponsoring groups, 
and that each sponsor has proportionate representation on the board 
of trustees. 

The charter enables the AICPA to control the FAF since 
five of the nine trustees are directly assigned to the AICPA. Each of 
the other four sponsoring groups is permitted one trustee, however, 
most of those trustees also have membership in the AICPA. The votes 
of six of the nine trustees are necessary to act for the FAF, and the 
AICPA needs only one vote from its members belonging to the other 
sponsoring groups to have a six- vote majority on the board of 
trustees. 

The charter has yet another provision which guarantees that 
the AICPA will completely control the FAF. The charter specifically 
directs that the AICPA's board of directors shall ex officio constitute 
the voting membership of the FAF as a non-profit corporation. Thus, 
the exclusive power to elect the entire FAF board of trustees is auto- 
matically given to the AICPA's board of directors. 

A description of the composition of the AICPA's board of directors 
and the identities of the groups that control it are included in the pre- 
vious chapters of this study dealing with the organization of the 
AICPA and the influence of the "Big Eight" accounting firms on its 
activities. In summary, all of the significant AICPA committees, in- 
cluding the board of directors, are controlled by the large national 
accounting firms. 

As the solely designated corporate electors of the FAF, the AICPA's 
board of directors is in the position of both nominating and electing 
the four FAF trustees who are practicing CPAs. In addition, the 
chairman of the AICPA's board of directors is automatically desig- 
nated as an FAF trustee. Control over the selection of trustees 
by the other four sponsoring groups is exercised by the requirement 
that all trustees must be elected by the AICPA's board of directors, 
who are exclusively designated as "electors" in the FAF bylaws. 

Because the other four sponsoring groups may nominate, but not 
actually select, their choices as trustees, the bylaws provide that each 
sponsoring group shall submit a list of three or more nominees to the 
AICPA's Board of Directors. Although there is a requirement that 
"the Electors shall not unreasonably withhold the election of a trus- 
tee from among the nominees submitted by a nominating organiza- 
tion." the FAF bylaws nevertheless state that "the Electors shall be 
the sole determiners of whether a nominee is suitable for election as 
a trustee." If another sponsoring group should attempt to nominate 
persons who are not acceptable as trustees to the AICPA's board of 
directors, and consultations do not resolve the differences, the board 
of directors, under the bylaws, may simply elect someone who in its 
judgment is acceptable and meets the experience qualifications de- 

ribed in the bylaws. 

The two most important functions performed by the FAF's board 
of trustees are the appointment of FASB and FASAC members, and 



141 

the financing and budget approval of the FASB and FASAC opera- 
tions. Consequently, the FAF charter restricts the ability of the trus- 
tees to influence directly the activities of the FASB and the FASAC 
because such direct influence could appear to affect the "independence" 
of the FASB. 

There are three basic restrictions placed on the FAF board of trus- 
tees. The first is that no trustee may simultaneously serve as a member 
of the FASB or the FASAC. This provision prevents the obvious con- 
flict, of having members of the board of trustees appoint themselves 
to the FASB or the FASAC, and thus become involved in the actual 
setting of accounting standards. 

The second restriction is that the board of trustees may not con- 
dition its approval of the FASB's budget on the agreement that 
the FASB shall undertake or not undertake any particular project 
relating to its function of setting accounting standards. This restric- 
tion prevents the trustees from withholding financing to influence the 
actions of the FASB. 

The third restriction narrows the reasons for which the FAF board 
of trustees may remove a member of the FASB from office. A two- 
thirds majority vote of the trustees is necessary to remove an FASB 
member. The bylaws state that a member may be removed only 
for disability lasting more than six months, for "malfeasance or 
alleged malfeasance in office," or for other cause deemed by the trus- 
tees as "reasonably evidencing conduct detrimental to the purposes 
or repute of the FASB." 

This last condition of removal is apparently broad enough to permit 
removal for anything that might offend the sensitivities of the FAF 
trustees. Conceivably, espousing the view that the FASB is incapable 
of setting accounting standards in the public interest, or that the 
Federal Government should use its authority in this area of public 
policy, could well be interpreted by the FAF trustees as "reasonably 
evidencing conduct detrimental to the purposes or repute of the 
FASB." Thus, FASB members are not truly independent once they 
are appointed ; it is always possible that they may be removed if they 
do not continue to meet the expectations of the trustees. 

The same conditions of removal also apply to removal of FAF 
trustees. The bylaws provide that a two-thirds majority vote of the 
AICPA's board of directors is necessary to remove a trustee 
from office. The grounds for removal include disability, malfeasance 
in office, and the broad consideration of conduct "detrimental to the 
purposes or repute of the FAF or the FASB." In the same manner 
by which the FAF trustees may continue to control the conduct of 
FASB members, the AICPA's board of directors may continue its 
control over the conduct of the FAF trustees. 

Although expressed in the FAF bylaws as a restriction on removal, 
the detrimental conduct provision reads more like an excuse for re- 
moval. An additional factor weakening the restrictions on removal of 
trustees and FASB members is the extensive amount of discretion 
permitted the AICPA's board of directors and the FAF trustees in 
performing their duties. They are permitted, under the FAF charter 
and bylaws, broad authority to modify decisions regarding the selec- 
tion and removal of officials and in performing other functions. 

Furthermore, there are no legal remedies against the AICPA's 
board of directors or anyone involved in the FAF organization, even 



142 

if they decide to violate openly the provisions of the charter and 
bylaws. They are private organizations, and the chairman of the 
FASB has pointed out that the Federal courts have declined to get 
involved with the procedures of private organizations that are en- 
gaged in setting accounting standards. (See "The Politics of Estab- 
lishing Accounting Standards" in Appendix H, at page 1398.) The 
careful manner of selecting FAF trustees and FASB members makes 
it unlikely that any of them would need to be removed for disagree- 
ment with the AICPA's board of directors. 

The FAF charter also grants to the board of trustees the exclu- 
sive power to amend the certificate of incorporation and bylaws of 
the FAF. The vote of eight trustees is necessary to amend either the 
certificate of incorporation or the bylaws. 

As shown by Chart 3 on page 137, the FAF is a conduit to the FASB 
for the AICPA and the other four sponsoring groups. Operating 
funds and the authority to set accounting standards within the private 
sector pass from the AICPA and the other sponsors through the FAF 
to the FASB. 

Therefore, the FAF is organizationally separate from the sponsor- 
ing groups and functionally separate from the FASB. It is necessary 
to the scheme of the FASB, as the "independent" standard-setting 
body within the private sector, that there be an appearance of inde- 
pendence from the AICPA and the other sponsoring groups. That re- 
quires an intermediate level of organization between the FASB and 
its sponsors, and the FAF supposedly fills this need. 

Without the FAF, the AICPA and the other sponsors would be 
forced to appoint the members of the FASB and finance its opera- 
tions directly. The FASB would then obviously appear as nothing 
more than a joint committee of the sponsoring groups, and could not 
be referred to as "independent." 

The assertion that the FASB is "independent" is important because 
that is the primary factor which is supposed to boost its credibility 
beyond that of the previous standard-setting bodies within the private 
sector. 

Repeated transfer of funds and authority among organizational 
units cannot separate them if each one is in effect controlled by the 
same private interest groups. As has been shown, the FAF charter and 
bylaws are carefullv worded so that the AICPA will control the FAF, 
and the other four FASB sponsors will have a minority influence on 
FAF activities. Other than the fact that it has its own certificate of 
incorporation and bylaws, the FAF is really not much different from 
other AICPA committees which have had outsiders as members. The 
AICPA maintains ultimate control, and the members selected to serve 
on the FAF tend to closely reflect the views of the AICPA's leader- 
ship. 

The following section will illustrate how the AICPA's control over 
the FAF is extended to the FASB by the language of the charter and 
bylaws. That is the next step in the elaborate system by which the 
AICPA's board of directors exercises control over the setting of ac- 
counting standards under the guise of the "independent" FASB. 

Financial Accounting Standards Board (FASB) 

The FASB conducts the actual research on accounting standards, 
considers the views of the five sponsoring groups and others which 



143 

are submitted in response to proposals, and makes the final decisions 
as to how financial information will be presented to the public. 

Before considering the composition of the FASB, the extent of its 
resources should be recognized. The 1975 annual report of the FASB 
shows that it had revenues of almost $5.3 million and expenditures of 
over $3.5 million, with a balance of $4.4 million left in its general fund. 
(See Appendix H, page 1363.) It has a full-time staff of approxi- 
mately 80 persons which is complemented by part-time volunteers 
from the major accounting firms and big businesses who work on 
specific projects. All of these resources are applied to the task of 
setting financial accounting standards according to the detailed proce- 
dures described in the FAF bylaws and the FASB rules of procedure. 

The FASB is comprised of seven full-time members who are ap- 
pointed to serve staggered five-year terms by the FAF board of trus- 
tees. No more than two consecutive five-year terms may be served by 
any individual member. 

The FAF bylaws require that four of the seven FASB members be 
CPAs who are principally experienced as public practitioners. The 
three remaining FASB members need not be CPAs, but are required 
to be well-versed in the problems of financial reporting. The FAF 
board of trustees appoints one member to serve at its pleasure as 
chairman of the FASB. 

To date, all of the members appointed to the FASB have been mem- 
bers of one or more of the five sponsoring groups. (See Appendix H, 
page 1263.) Four members, including the chairman, were formerly 
with large accounting firms. The other three FASB members include 
a former accounting educator, a former corporate financial executive, 
and a former chief accountant of the Federal Power Commission. 
Although the bylaws permit appointment of as many as three FASB 
members who are not CPAs, only CPAs have been appointed so far. 

FASB members are well-compensated and are expected to sever all 
financial connections which they believe might affect the objectivity 
of their decisions. Each of the six regular members of the FASB 
receives an annual salary of $115,000, and the chairman is paid 
$150,000 annually. In addition, FASB members receive generous re- 
tirement, life insurance, and health insurance benefits. (See Appendix 
H, pages 1228 and 1229.) 

The theory behind substantial compensation for members is 
that such amounts are necessary to attract competent individuals to 
serve on the FASB, and to ensure that members are financially 
independent from their previous business and professional affilia- 
tions. The large salaries paid to members do not guarantee their 
independence from the five private interest groups and their members 
which sponsor the FASB. Most of the money for operating the FASB. 
including the salaries and benefits of its seven members, comes directly 
from the contributions of the sponsoring groups and their influential 
members. The FASB and its members are thus dependent on the con- 
tinued voluntary financial support of the five sponsoring groups, espe- 
cially the AICPA and the Financial Executives Institute, which are 
the largest, sources of contributions. 

Continued voluntary financial support for the FASB can reason- 
ably be expected to be related to the acceptance of FASB pronounce- 
ments by its sponsoring groups. If it should act against their 
collective desires, then financing for the FASB might not be forth- 



144 

coming. In that situation, its members would stand to lose their 
generous compensation and benefits. The greater the amount of com- 
pensation and benefits, the greater the amount of personal financial 
loss which would be sustained by members of the FASB. Thus, the 
high level of compensation paid to members of the FASB can be 
viewed as actually increasing their dependence on the private interest 
groups which are its sponsors. 

The manner in which FASB members are selected ensures that they 
will be compatible with the interests of the sponsoring groups. The 
FAF board of trustees, which is itself carefully chosen in a manner 
to reflect the views of the AICPA's board of directors and the other 
four sponsoring groups, appoints the members of the FASB according 
to the formula set forth in the FAF bylaws. As the chosen agent of 
the AICPA and the other sponsors, the board of trustees appoints 
persons who represent the respective interests of the sponsors to the 
FASB. 

All authority to set financial accounting standards and the proce- 
dures for reaching decisions on such standards is delegated to the 
FASB by the FAF charter and bylaws. The FASB makes the actual 
decisions on which accounting standards will govern the presentation 
of financial information to investors, creditors, governmental author- 
ities and the public. An affirmative vote by five of the seven members 
is necessary to issue authoritative pronouncements on accounting 
standards. 

As part of its claim to independent operation in the public interest, 
the FASB has developed rules of procedure for promulgating ac- 
counting standards. The procedural rules generally permit an orga- 
nized opportunity for critical comment on FASB proposals before 
they are finally adopted as standards. Even though there is theoreti- 
cally an opportunity for the public to comment on FASB proposals, 
limited public awareness of the FASB and its impact on important 
economic and social issues effectively preclude active participation by 
diverse segments of society in the standard-setting process. 

Under the FAF bylaws, the chairman of the FASB is granted a 
great deal of influence over its activities because of his authority to 
schedule projects, hire the staff, and control the resources of the FASB. 
The extent of the chairman's influence is described in the bylaws : 

Section 11. Chairman of the Financial Accounting Standards 
Board — 

The Trustees shall appoint, to serve at their pleasure, a member 
of the FASB as its Chairman and may also appoint one or more 
other members as Vice Chairmen to exercise the powers and to 
carry out the duties of the Chairman in his absence or disability. 
The Chairman of the FASB shall serve ex officio as Chairman of 
the Council (FASAC). The Chairman shall be the principal 
officer of the FASB and the Council, and shall preside at their 
meetings. 

The Chairman shall prepare the agenda of projects of the 
FASB and assign priorities thereto for submission to the FASB 
for approval. He shall prepare the annual budget of the FASB 
and the Council following consultation with other members of 
the FASB, and submit such budget to the Trustees for their 
approval. He shall also prepare an annua 1 ! report with respect 



145 

to the activities of the FASB and the Council and shall submit 
such report to the Trustees, the AICPA and the nominating 
organizations, which report shall constitute a portion of the pub- 
lic record of the FASB. 

He shall have authority to hire, retain and contract with staff 
members to serve the FASB or the Council, to fix their duties 
and the amount of their salaries and other compensation and to 
appoint and contract with any other persons or organizations 
with respect to research and other services to be performed by 
them as consultants or independent contractors. The Chairman 
also shall have authority to establish and appoint persons to task 
forces (who may but need not be members of the FASB or the 
Council) with the advice of other members of the FASB and, as 
he may deem appropriate, after consultation with members of 
the Council, and he may delegate or assign particular functions 
or duties to other members of the FASB, the staff of the FASB 
or the Council or others as he may determine. 

The Chairman shall be responsible for establishing operating 
and administrative procedures for task forces and the staffs of the 
FASB and the Council, and for implementing and directing the 
broad operating processes of the FASB and the Council. 

He may appoint an administrative director and a research di- 
rector and shall designate a member of the staff of the FASB to 
serve as secretary and to keep a record of its proceedings. Staff 
members, and members of task forces, and other persons and 
groups employed, hired or otherwise retained or appointed by or 
at the direction of the Chairman, shall serve at the pleasure of 
the Chairman or as otherwise provided in contracts made by or at 
his direction. 

One of the most important responsibilities assigned to the chairman 
of the FASB is the authority to appoint task forces for specific 
projects. Much of the work in researching and developing FASB posi- 
tions on particular accounting issues is performed by such task forces. 

The direction taken by the FASB on various accounting issues can 
be profoundly influenced by the composition of the task forces in- 
volved in developing the issues. The influence of the task forces is 
enhanced because FASB members and staff are included as members 
and work closely with the outside members of the task forces. 

The FASB has provided this subcommittee with a list of task force 
members and their principal business affiliations, as well as a list of 
consultants hired by the FASB. (See Appendix H, pages 1303 and 
1301.) This subcommittee has rearranged the. members of the task 
forces according to the principal business affiliations of the members 
serving on each task force. (See Appendix H, page 14*23.) The sub- 
committee's compilation of the various interests represented on the 
task forces shows a preponderance of large accounting firms, corpo- 
rate clients of "Big Eight" accounting firms, contributors to I 
FASB, large investment firms, and big banks. 

Many of the task force members have significant vested interests in 
the FASB's decisions on the accounting issues being considered by a 
particular task force. Of the 179 task force members listed by the 
FASB, three represent the Federal Government, one represents a labor 
union, and the rest represent private business interests or are 
academics. There are no representatives from small businesses, con- 
sumer organizations or public interest groups. 



146 

An example of FASB task force membership selection is the extrac- 
tive industries task force which is developing the FASB proposals on 
accounting standards to be used by oil, gas, and mining companies. 
Accounting methods used by the extractive industries have been con- 
troversial and the subject of recent congressional action. This subcom- 
mittee has compiled a list showing 19 identifiable interests serving on 
the extractive industries task force. (See Appendix H, page 1425.) 
Of those 19 interests, IT are easily identified as having an actual 
or potential financial interest in the outcome of the controversy regard- 
ing accounting methods used by extractive industries. Among them 
are two mining companies, six oil companies, five of the "Big Eight" 
accounting firms with major corporate clients in the extractive indus- 
tries, three large investment firms, and one of the Nation's largest 
banks with substantial financial interests in the extractive industries. 

The views of the five private interest groups sponsoring the FASB 
are reflected in both the decision-making and working levels of the 
FASB. Through the FAF, the FASB is dependent on its sponsors for 
the bulk of its financial support, and for the appointment, reappoint- 
ment, and continuing approval of its well-compensated members. 
Without the substantial voluntary financial and organizational sup- 
port of the five sponsoring groups, the FASB would not be able to 
survive. 

The AICPA and the other four sponsors have ensured that the 
FASB will operate in their interests by creating an organizational 
system which selects acceptable persons to serve on the FAF and the 
FASB, and by making the FASB financially dependent on the 
sponsoring groups. As will be shown subsequently, the FASB has 
performed in accordance with the interests expressed by the AICPA, 
the major accounting firms, and the big corporations primarily affected 
by the accounting standards issued by the FASB. Despite its elaborate 
organization and procedures, the FASB is not independent, and cannot 
be realistically expected to ever become independent from the AICPA 
and the other four private interest groups which sponsor it. 

Financial Accounting Standards Advisory Council (FAS AC) 

The Financial Accounting Standards Advisory Council (FAS AC) 
is the third organizational unit in the FAF-FASB structure. Unlike 
them, however, the FASAC does not play a substantial role in the 
process by which funds and the authority to set accounting standards 
within the private sector flow from the AICPA and the other sponsor- 
ing groups in an effort to create an appearance of "independence." 
Instead, the FASAC advises the FASB and provides an organized 
apparatus to give credence to the FASB's claim that it seeks divergent 
views on accounting issues. 

According to the FAF bylaws, the FASAC is to be comprised of at 
least 20 persons who, in the judgment of the FAF board of trustees, 
are knowledgeable about the problems and impact of financial report- 
ing. The board of trustees appoints members of the FASAC for 
one-year terms, with a normal maximum of four consecutive terms. The 
FASAC members are required to "broadly represent varied profes- 
sional and occupational backgrounds with no profession or occupation 
predominating." 



147 

The chairman of the FASB also heads the FASAC. Upon his re- 
quest, members of the FASAC consult with the chairman concerning 
the FASB's agenda of projects, the priority assigned to such projects, 
matters likely to require the attention of the FASB, and the selection 
of FASB task forces. Upon request of the chairman, the FASAC 
members also provide written comments on proposed FASB interpre- 
tations of existing accounting standards. The FAF bylaws require 
that the FASAC meet as a body a' least quarterly; its members are 
paid only for their expenses. The bylaws provide that the FASAC 
shall not vote as a body or issue public communications. 

The FASAC is only one source from which the FASB receives 
comments on its activities, but it is the one source of advice and com- 
ment which is organized by the five sponsoring groups as part of the 
FASB operation. The FASAC is important in helping to create an 
appearance that the FASB is "independent" and has broad-based 
support. 

Currently, 32 members serve on the FASAC. A list of its members 
and their primary business affiliations is contained in Appendix H. 
at page 1395. Of the 32 members, two are from the Federal Govern- 
ment, two are academics active in the groups sponsoring the FASB, 
and one is a retired chief accountant of the SEC who subsequently 
worked as a consultant for the AICPA. The other members of the 
FASAC are drawn from the same group of big accounting firms, big 
investment firms, big law firms, and big corporations which dominate 
every facet of FASB activity, and which constitute the primary mem- 
berships of the five private interest groups sponsoring the FASB. 
Thus, the interests of other groups that are profoundly affected by 
FASB pronouncements — such as small investors, small businessmen, 
consumers, and public interest groups — are not represented even on 
the FASAC, which only advises the FASB. 

Although the determination of financial accounting standards di- 
rectly and indirectly affects all levels of society, the FAF, the FASB 
and the FASAC are structured so that only the narrow vested interests 
of the influential members of the AICPA, the Financial Executives 
Institute, and the other sponsoring groups are actively represented in 
the standard-setting process. As presently constituted, the FASAC 
is just another device by which the AICPA and the other sponsoring 
groups are attempting to create an appearance of "independence" in 
the setting of accounting standards by appointing their own influen- 
tial members to separate organizations which are controlled and sup- 
ported by the five sponsors. 

Policies to Prevent Conflicts of Interest on the FASB* 

As part of the attempt to have the FASB accepted as an ''independ- 
ent" body operating within the private sector, the AICPA incorpor- 

*The following policies regarding conflicts of interest apply only to members and staff 
of the FASB. This subcommittee also reouested a description of any restrictions on con- 
flicts of interest by members of the FAF board of trustees and the AICPA's board of 
directors. That request was prompted by the very important and influential roles played 
by those persons in selecting the members of the FASB and financing its operations. 

The FASB responded that the FAF bylaws and the trustees' policies are so successful 
in assuring that the FASB is independent and free from outside pressures that, apart 
from practical considerations, there is no need to impose any restrictions on the AICPA's 
board of directors or the FAF board of trustees. Tn view of its advisory role, members of 
the FASAC are not subject to anv restrictions regarding conflicts of interest. (See Ap- 
pendix H. page 1292. 



148 

ators of the FAF provided in the bylaws that the board of trustees 
should develop policies which, in the judgment of the trustees, would 
prevent conflicts of interest concerning the seven members of the FASB 
and three senior staff administrators. Also, the chairman of the 
FASB, who exercises complete authority over its staff, has issued gen- 
eral policies covering all staff members which are similar in tone to the 
conflict of interest policies established by the board of trustees. (See 
Appendix H, pages 1266 and 1287.) 

The policies and procedures designed by the FAF board of trustees 
and the chairman of the FASB to prevent conflicts of interest are in- 
adequate to fulfill their stated purpose "to establish to public satis- 
faction the independence and objectivity of those responsible for 
establishing and improving standards of financial accounting and 
reporting." Under its policies regarding conflicts of interest, the 
FASB has noted that no occasion has arisen to date requiring or re- 
sulting in disciplinary action against any members of the FASB or its 
staff. 

In keeping with its claim of independence, the FASB has stated in 
describing its conflict of interest policies and procedures : "These poli- 
cies are based on the premise that there can be no conflict, or the ap- 
pearance of any conflict, between a Board or staff member's private 
interests on the one hand, and the public interest and his duties to the 
Financial Accounting Foundation and the FASB on the other." The 
FASB has also recogized that "independence and objectivity are in 
large measure subjective, rather than objective, qualities when viewed 
by the public ..." 

Despite its recognition that even the appearance of a conflict of in- 
terest is enough to subvert public confidence, the FASB's policies 
permit members and staff to own or hold unlimited amounts of 
investments which could cause conflicts of interest. The basic FASB 
attempt to prohibit conflicts of interest involves a description of 
policies in that area which is distributed to all FASB members 
and senior administrators. Also, a signed statement requiring an 
affirmation by each member that he is following those policies must 
be filed annually, along with a listing of all "material'' investments 
held by a member or his immediate family. 

The FASB's conflict of interest policies prohibit a member from 
directly or indirectly owing financial or other obligations to any for- 
mer employer, business partnership, or client. In like manner, 
members are also prohibited from being directly or indirectly owed 
any financial or other obligations by any former employer, business 
partnership, or client. These basic prohibitions are sound policies de- 
signed to prevent FASB members from having vested financial inter- 
ests in the outcome of the accounting standards they set. However, 
their positive effect is essentially negated by very significant excep- 
tions to the restrictions on financial obligations. 

Some minor exceptions to the flat ban on financial obligations with 
former employers, partnerships, or clients are permitted FASB mem- 
bers. For example, the prohibitions sensibly make exceptions for 
financial obligations arising from normal banking relationships, 
fixed retirement or annuity payments that are vested and not ma- 
terially affected by future business operations, ownership of Govern- 
ment securities, and commonplace agreements not to compete or di- 



149 

vulge trade secrets. The FASB's exceptions to its ban on financial 
conflicts of interest, however, do not stop with such relationships. 
It permits members to invest freely in securities listed on a national 
securities exchange or traded in the over-the-counter market. FASB 
members are also permitted to become limited partners in investment 
vehicles. 

Conflict of interest rules that permit unlimited investments in 
all types of publicly traded securities, as well as private investment 
consortia, are meaningless. Many of the greatest increases and de- 
creases in stock prices that have occurred during the past decade have 
been occasioned by the use of accounting practices which have been — 
and will continue to be — the subjects of FASB consideration and 
decision-making. 

FASB members are in a unique position to influence stock prices 
through their decisions on accounting standards, and to profit from 
investment in the securities of companies that are affected by their 
decisions. Although their potential influence on the prices of securi- 
ties of large corporations is great, the influence of the FASB's ac- 
counting decisions on the value of investments in smaller companies 
and limited investment consortia is often even greater because permis- 
sible accounting practices may have a more noticeable effect on the 
presentation of operating results. Accounting methods are crucial to 
the determination of investment values because they measure costs, 
profits, asset values, liabilities, and other factors which affect decisions 
as to whether particular investments are worthwhile. In the past, use 
of a variety of questionable accounting methods has been instrumental 
in giving many investments an appearance of value which was not 
actually present, and has led to manipulation of securities prices. 

Persons who are charged with the responsibility of setting account- 
ing standards that will eliminate abusive accounting practices should 
not have any significant financial interest in the results of their deci- 
sions. Conflict of interest rules which permit FASB members to have 
unlimited investments in both publicly-traded securities and private 
consortia do not meet that requirement. Even the few restrictions 
that do exist for financial obligations extend only to former employ- 
ers, partnerships, and clients. Conflicts of interest arising from poten- 
tial business relationships are not covered at all. 

Although "blind trust" arrangements do not provide complete assur- 
ance that conflicts of interest will be prevented, they do provide cer- 
tain restrictions over personal control of financial activities. However, 
the FASB's regulations have no requirements whatever that its mem- 
bers be precluded from exercising total discretion and control over 
their investments. Thus, other than the prohibition against direct 
agreements with former business associates to share in their profits. 
FASB members essentially are not restricted in any manner from hav- 
ing investments which are or may be affected by the accounting stand- 
ards they set. 

The policies established by the FASB to prevent conflicts of interest 
also include some restrictions on the outside activities of its mem- 
bers. There are restrictions against unapproved speeches or writings, 
receiving fees from speeches and writings, disclosing information on 
FASB activities, having future employment agreements, and serving 



150 

as an officer or director of another organization. Once again, signifi- 
cant exceptions to these rules are permitted. 

For example, FASB members are specifically allowed to serve as 
officers or directors of family or personal investment companies. Also, 
a member of the FASB from one of the "Big Eight" accounting firms 
recently resigned prior to the end of his term, and announced that he 
was returning to practice with his former firm. (See Appendix H, 
page 1419.) It was not publicly explained how his resignation satisfied 
the FASB's rule that u no Member or Director shall have any formal 
or informal agreement, arrangement or understanding with any per- 
son to the effect that after termination of his employment relationship 
with the Foundation or the Standards Board he can or will return to, 
or become affiliated with an employer or business partnership, or 
resume or enter into consulting or other similar arrangements." It 
seems doubtful that an FASB member would resign with an announce- 
ment of his intent to return to his previous business affiliation without 
some formal or informal agreement, arrangement or understanding 
that he was wanted back and that there was an acceptable position 
for him. 

His resignation illustrates another problem with the policies devel- 
oped by the FASB to prevent conflicts of interest. There are no effec- 
tive procedures for enforcing them. Enforcement of the FASB's 
policies is based on the notion that persons involved in conflicts of 
interest will voluntarily report their violations of the rules and take 
steps to rectify them. That notion has been discredited by continual 
revelations of massive and serious wrongdoing by top members of the 
business community, the professions, and the government. 

Manv of the abuses have involved financial conflicts of interest. 
Almost all of them have been revealed through involuntary means. 
Even the SEC's "voluntary" program urging corporations to disclose 
improper or illegal payments was accompanied by threats of more 
stringent punitive measures against those failing to cooperate. Per- 
sons involved in improper or illegal activities tend to regard voluntary 
confession as an act that truly conflicts with their special interests. 

The strongest sanction which the FASB may use against an errant 
member is termination of employment with the FASB. That sanction 
is particularly ineffective against a member who violates the prohibi- 
tion against future employment agreements. In that situation, the 
member is leaving the FASB for a preferred outside employment op- 
portunity anyway. 

As a means of enforcing prohibitions against conflicts of interest, 
the FASB policies provide that a member who believes he may have 
a conflicting interest affecting his "independence" and obiectivity 
should consult with one or more members of the FAF board of trustees 
designated to handle such problems. He is also required to make avail- 
able relevant information which is reasonably requested by them. If, 
as a result of such consultations, the FASB member decides that he 
should disqualifv himself from a vote or from specific functions or 
activities, the rules provide that he should notifv the trustees and the 
chairman of the FASB at the earliest possible time. Apparently, each 
FASB member is his own judsre regarding the proprietv of invest- 
ments or activities which could be viewed as conflicts of interest be- 
cause the decision on disqualification is left to the individual members. 



151 

Unlike disqualification decisions by members of public bodies, the 
failure of an FASB member to disqualify himself because of a con- 
flict of interest cannot be appealed to the courts. The Federal courts 
have held that the AICPA's previous standard-setting efforts merely 
express private opinions, and do not violate the rights of those affected 
by such accounting standards. For its part, the SEC has already de- 
cided in advance that FASB decisions on accounting standards are 
valid. 

The FAF bylaws specifically provide that, notwithstanding an 
FASB member's disqualifying himself from voting, he may continue to 
participate in public hearings and the process of research, discussion, 
and deliberation. Instead of encouraging members to disqualify 
themselves whenever there is even an appearance of a conflict of in- 
terest, the FASB policies actually urge members not to disqualify 
themselves without careful thought. Noting that FASB members can 
still participate in decision-making activities after disqualifying 
themselves, the policies state: "However, in view of the importance 
and public significance of the powers, functions and activities of the 
Standards Board, Members should consider thoroughly, and consult 
to the fullest extent, with the Committee (of Trustees) before decid- 
ing to disqualify themselves on a particular vote." 

"material" investments 

In order to enhance the value of its conflict of interest policies which 
depend on voluntary compliance, the FASB requires its members 
and senior administrators to file an annual report with the commit- 
tee of FAF trustees designated to handle such matters. (See Appendix 
H, at page 1273.) Basically, the annual report requires each member to 
sign an affirmation that he understands and is obeying the FASB's 
prohibitions against conflicts of interest, and to attach a list of all 
"material" investments. 

The annual report instructions clearly state that the list of "ma- 
terial" investments shall not be deemed to create a presumption that 
such investments affect an FASB member's "independence" or ob- 
jectivity. As described previously, FASB members are free to invest 
in almost anything, and the annual report is designed merelv to list 
the "material" investments. 

From the standpoint of an individual desiring to disclose as little 
as possible concerning his personal investments, the FA SB's defini- 
tion of "material" investments is quite generous. The annual report's 
instructions state that, if the aggregate value on the reporting date 
of all securities of a particular issuer equals or exceeds the greater of 
(i) 10 percent of a member's net worth at such date, or (ii) $25,000. 
then those securities should be listed in the annual report. In other 
words, investments in individual companies that aggregate less than 
Siio.OOO for each company need not be reported. Reporting limits for 
wealthier FASB members may be even higher depending on the 
size of their net worth. Members are not required to report certificates 
of deposit of banks, savings and loan associations, or other such insti- 
tutions, regardless of value. 

Much of the public would not agree with the FASB that invest- 
ments reaching $24,990 are immaterial. The reporting limitations, 



152 

however, do not really affect the public's awareness of existing or 
potential conflicts of interest at the FASB because the annual re- 
ports of its members are not disclosed to the public. They are dis- 
closed only to the trustees of the FAF who are designated to handle 
such matters. Thus, the FASB members are accountable only to a 
select few members of the FAF board of trustees who are chosen by 
the AICPA and the other four private interest sponsors of the FASB. 
The public is left to accept at face value the FASB's assertions re- 
garding the absence of conflicts of interest. 

The chairman of the FASB has complete control over its staff. He 
is responsible for all consultations and decisions involving existing 
and potential conflicts of interest by staff members. 

The rules of conduct governing conflicts of interest which he has 
issued for observance by the entire FASB staff are similar to the pol- 
icies applying to FASB members and senior administrators. However, 
staff members are required only to sign an affirmation that they have 
read and understood the conflict of interest rules. 

A review of the FASB's policies and procedures to prevent con- 
flicts of interest by members and staff shows that they are essentially 
useless as a basis for public confidence in the independence and ob- 
jectivity of the FASB. Despite pages of elaborate language, the only 
real restriction on conflicting investments which emerges from the 
FASB policies is a prohibition against agreements to share directly 
in the profits of previous employers or business affiliations while serv- 
ing on the FASB. There are also some restrictions of questionable use- 
fulness on the outside activities of FASB members and staff. All of 
the policies and regulations depend largely on self-enforcement by 
individuals who are expected to report and rectify their own existing 
or potential conflicts of interest. 

Other than termination of employment with the FASB, there are 
no effective sanctions which can be used to enforce the rules of con- 
duct. Even termination of employment may be ineffective in many 
cases. The reporting system, such as it is, can be expected to detect 
only the most flagrant conflicts of interest. In any event, the reports 
are disclosed only to a select few persons concerned with avoiding any 
actions which would hint of scandal at the FASB. 

The FASB's conflict of interest policies are worth noting as an in- 
dication of the type of procedures which its private sponsors believe 
is adequate to ensure public confidence in the setting of accounting 
standards. However, ineffective rules are no better than complicated 
organization charts in achieving real or apparent independence. The 
FAF, the FASAC. and the elaborate system of policies and proce- 
dures simply attempt to give the FASB an appearance of independ- 
ence and concern for the public in setting accounting standards. 



CHAPTER VI. INFLUENCE OF THE AICPA AND THE "BIG 
EIGHT" ACCOUNTING FIRMS ON THE FASB 

As has been described in previous sections of this study, the "Big 
Eight" and the other large national accounting firms control the 
AICPA, and the AICPA controls the FASB. The "Big Eight" ac- 
counting firms are able to control the FASB by directly influencing its 
operations and activities, and also through their control of the AICPA 
and the authority it exercises over the FASB. The controlling influence 
over the FASB exercised by the "Big Eight" on their own and through 
the AICPA takes three basic forms which are essential to the opera- 
tion of the FASB — money, personnel, and organizational support. The 
ability of the "Big Eight" and the AICPA to control the FASB is not 
accidental, but was carefully conceived and written into the certificate 
of incorporation and bylaws of the FAF and the FASB. 

Money 

The first of the three essentials for operating the FASB is money. 
Because the FASB was designed to be dependent on voluntary con- 
tributions for most of its multi-million dollar budget, the sponsoring 
groups established a program which would attract volunteers with 
resources large enough to meet its budget. The "Big Eight" firms and 
the AICPA agreed to be the primary "volunteer" contributors. Sub- 
stantial contributions through the FAF to the FASB are one means 
of controlling its activities to ensure that financial accounting stand- 
ards remain compatible with the interests of the "Big Eight" and their 
clients. 

The amounts invested in maintaining control over accounting stand- 
ards through "voluntary" contributions have been substantial indeed. 
According to the 1975 annual report of the FASB, almost $11.9 million 
has been contributed to the FAF for use in operating the FASB since 
its founding in 1972. The accounting profession has contributed about 
$6 million, or 51 percent of the total amount contributed for operating 
the FASB. 

In 1975 alone, the FAF received $4,129,201 in total contributions. 
The accounting profession donated $2,059,076, half of the total. (A 
summary of the contributions received in 1975 and 1974, along with a 
detailed list of every person or organization donating $1,000 or more, 
appears in Appendix H, p. 1232.) A review of the significant donors 
listed as beiri<r from the accounting profession shows that 99.6 percent 
of the $2,059,076 contributed in 1975 was donated by the "Big Eight." 
the AICPA. and 41 other accounting firms. 

The AICPA has described the commitment of the accounting pro- 
fession to support the FASB in Appendix E. at p. 877. As the major 
force behind the creation, organization and operation of the FASB. 
the AICPA and its members have agreed to provide $2 million in con- 
tributions each year toward its support. The AICPA has a subsidiary 

053) 



154 

organization called the Accounting Research Association whose sole 
function is to raise money from AICPA members for donation to the 
FAF. 

The Accounting Research Association raises money from AICPA 
members in the form of annual "dues" which are computed according 
to a sliding-scale formula based on the size of member accounting 
firms.* As the only firms in the largest size category, the "Big Eight" 
each pay annual dues of $200,000 to the Accounting Research Associ- 
ation. Most of the remaining dues received by the Accounting Re- 
search Association comes from 41 other accounting firms. After pay- 
ing its fund-raising expenses, the Accounting Research Association 
contributes the bulk of the dues it receives to the FAF for use in oper- 
ating the FASB. 

Dues paid to the Accounting Research Association are tax-deduct- 
ible, so the taxpayer partially subsidizes the operation of the FASB. 
By contributing to the Accounting Research Association, the big ac- 
counting firms also add another level of organizational separation be- 
tween their money and the operation of the FASB. The Accounting 
Research Association is merely a conduit established by the AICPA to 
channel money to the FAF for the FASB, but the flow of money and 
authority from one organization to another is important as support 
for the AICPA's claim that the FASB is "independent." 

Collectively, the "Big Eight" firms contributed $1.6 million in 1975. 
That amounted to 78 percent of the $2,059,076 donated by the account- 
ing profession in 1975. The "Big Eight" are by far the largest indi- 
vidual contributors to the support of the FASB. (See Appendix H, 
p. 1233.) 

The next seven largest accounting firms also contribute substantially 
to the support of the FASB. Counting both direct donations to the 
FAF and their Accounting Research Association dues, the next seven 
largest accounting firms contributed a total of $286,500 to the support 
of the FASB in 1975. The "Big Eight" and the next seven largest 
accounting firms thus gave a combined total of $1,886,500. That 
amounts to 92 percent of the total contributions from the accounting 
profession for the support of the FASB in 1975. 

The AICPA itself contributes a substantial amount to the FAF each 
year. Its stated policy is to donate $2 for each member of the AICPA, 
which amounted to $207,726 in 1975. Its policv on contributing to the 
support of the FASB reflects the attitudes of the "Bis; Eight" and the 
other large accounting firms which control the AICPA. 

It should be noted that the sum of the individual contributions for 
support of the FASB is greater than the total contribution of 
$2,059,076 to the FAF which is designated as coming from the account- 
ins: profession. The excess amounts are involved in running the 
AICPA's Accounting Research Association and its fund-raising activ- 
ities on behalf of the FAF. As previously described, the Accounting 
Research Association's fund-raising activities are a very real and 
necossarv part of financing the operation of the FASB. 

The FASB is a big-budget operation which receives substantial 
"voluntary" support from the accounting profession. About half of 
the total contributions to the FAF for use in operating the FASB 



*See p. 120 of this study for more detail on the AICPA's Accounting Research Associa- 
tion and its slidinp-scale dues arrangement. 



155 

come from the accounting profession. The FASB has stated that con- 
tributions from thousands of individual practitioners and local 
accounting firms are, in the aggregate, not significant. 

The accounting profession's financial support for the FASB is not 
broad-based. Almost all of the money designated as contributions 
from the accounting profession is donated by the 15 largest account- 
ing firms and the AICPA, which they control. 

Personnel 

The "Big Eight" accounting firms and the AICPA have a com- 
manding influence on the activities of the FASB through the direct 
participation of their present and former partners, members, and staff 
in the FASB's operation. The FASB has provided this subcommittee 
with a table showing the memberships held by the individuals on the 
FAF board of trustees, the FASB, and the FASAC in the five private 
interest groups sponsoring the FASB. (See Appendix H, p. 1263.) 

The FAF board of trustees has nine members, all of whom belong 
to one or more of the five sponsoring groups. Eight of the nine FAF 
trustees are members of the AICPA. Only one of the trustees sup- 
posedly representing the other four sponsoring groups is not also a 
member of the AICPA. The high concentration of AICPA members 
may reflect the fact that all FAF trustees are elected by the AICPA's 
board of directors. In addition to the control they exercise through 
the AICPA over the selection of all trustees, the "Big Eight" have 
three representatives serving directly as FAF trustees. That amounts 
to one-third of the members on the FAF board of trustees. 

The FASB has seven members, and all of them belong to one or 
more of the five sponsoring groups. Six of the seven FASB members 
belong to the AICPA. Again, only one of the representatives from the 
other four sponsoring groups is not also a member of the AICPA. 
Three of the FASB members are from "Big Eight" firms. 

The AICPA's control over the FASB is illustrated by the fact that 
all but one of the members on both the FAF board of trustees and the 
FASB are members of the AICPA. Through their control over the 
AICPA and its activities, the "Big Eight" firms are able to influence 
heavily the selection of the FASB members. The process of selection 
begins with election of the FAF trustees by the AICPA's board of 
directors, and is completed with the appointment of FASB members 
by the FAF board of trustees. The "Big Eight" firms also have sub- 
stantial direct representation on the FAF board of trustees and the 
FASB. 

There have been a number of representatives in the FASB organiza- 
tion from the AICPA's Wheat study group, which recommended that 
the FASB be created. The AICPA president who appointed the 
Wheat study group is now the chairman of the FASB. Two of the 
seven Wheat study group members have .served as FAF trustees. A 
third has since become the salaried president of the AICPA. The rela- 
tionship between the FASB and the leadership of the AICPA has 
been close. 

The Financial Accounting Standards Advisory Council (FASAC). 
which is supposed to provide the FASB witli outside advice, is also 
dominated by members of the five FASB sponsoring groups. About 



67-159 O - 77 - 12 



156 

half of the 31 FASAC members belong to the AICPA, and six of 
them are from "Big Eight" accounting firms. The heavy influence of 
the AICPA and the "Big Eight" is evident even on the FASAC 
where the stated objective is to gain a broad spectrum of opinions on 
accounting matters. 

The FASB's professional staff is dominated by former "Big Eight" 
and AICPA employees. (A list of its professional staff and their busi- 
ness affiliations immediately prior to joining the FASB staff appears 
in Appendix H, p. 1298.) This subcommittee was able to compare the 
FASB's list of professional staff with the 1974 list of AICPA mem- 
bers published by the AICPA. Overall, 23 of the 32 FASB profes- 
sional staff members are also listed as being members of the AICPA. 
That amounts to 72 percent of the total FASB professional staff. 

The concentration of AICPA members on the FASB staff is much 
greater in the higher staff positions and the positions which have the 
greatest impact on the accounting standards issued by the FASB. 
Three of the four FASB staff directors are members of the AICPA. 
Two of them were previously employed on the AICPA staff. All of 
the seven FASB project directors and the two FASB technical ad- 
visors belong to the AICPA. Four of the five FASB Fellows on its 
technical staff are AICPA members, along with two of the four FASB 
research and technical associates, and four of the six FASB technical 
assistants. AICPA members are thus well-established in the hierarchy 
of the FASB professional staff. 

The big national accounting firms are also well-represented on the 
professional staff of the FASB. Ten of the 32 staff members, includ- 
ing four of the seven FASB project directors, were previously with 
"Big Eight" accounting firms. Another three FASB staff members 
were previously with three of the next seven largest accounting firms. 
Forty-one percent of the FASB professional staff came directly from 
the Nation's 15 largest accounting firms. 

Organizational Support 

The organizational support of the AICPA and the "Big Eight" 
accounting firms is necessary for the FASB to have its pronounce- 
ments accepted by the businesss and financial community. The AICPA 
has been the primary private source of authority for accounting stand- 
ards since 1938. As the auditors for the vast majority of large corpo- 
rations, the "Big Eight" firms are involved in applying accounting 
standards in situations that have the greatest impact on the public. 

Accounting standards set by the AICPA have been accepted as 
authoritative over the years because of the expertise and impartiality 
which have been associated with the image of the accounting profes- 
sion and its institutions. The SEC's acceptance of accounting stand- 
ards developed by the AICPA has given them the stamp of Federal 
Government approval. The SEC formalized its approval of account- 
ing standards set by the FASB through the issuance of Account- 
ing Series Release 150. The AICPA has thus been able to establish 
itself as the authoritative source on accounting standards within the 
private sector. 

By creating the FASB, the AICPA has attempted to organize 
formally its authority to set accounting standards within the private 
sector, so that the FASB will be perceived as an "independent" body. 



157 

No other private organization could create a body to set accounting 
standards and immediately bestow upon it the reputation of being 
the accepted source of authority within the private sector. Without 
the support of the AICPA, the FASB could not have been created 
within the private sector as the instant authoritative source for ac- 
counting standards. 

Acceptance of the FASB's pronouncements by the "Big Eight" ac- 
counting firms is also very important. They have agreed to a system 
of enforced compliance with the accounting standards developed by 
the FASB. The AICPA's code of ethics now requires that FASB pro- 
nouncements be followed, and the SEC has its own rule (ASR 150) 
to force compliance with standards set by the FASB. These require- 
ments are significant because some major accounting firms had refused 
to abide with an accounting standard promulgated by the AICPA's 
previous standard-setting body. Accounting standards cannot be effec- 
tive if the "Big Eight" refuse to conform to them. 

Summary 

The AICPA and the "Big Eight" accounting firms are the most im- 
portant and influential supporters of the FASB. They were the major 
force in creating the FASB, and carefully organized its structure so 
that they would be able to control its operation. Their controlling in- 
fluence has been augmented by their substantial financial, personnel, 
and organizational support for the FASB. 

The accounting profession provides approximately one-half of the 
FASB's financial support from contributions. That amounts to $2 mil- 
lion per year from the accounting profession. Almost all of that is con- 
tributed by the ''Big Eight" firms and the AICPA. Financial support 
for the FASB within the accounting profession is narrowly concen- 
trated among the largest accounting firms and the AICPA which they 
control. 

The AICPA and the "Big Eight" accounting firms play a key role in 
the membership of the FAF. the FASB, the FASAC, and the profes- 
sional staff of the FASB. Almost all of the important positions in the 
FASB organization are held by AICPA members. A substantial num- 
ber of them are from "Big Eight" firms. The task forces which perform 
most of the preparatory work on accounting standards issued by the 
FASB are also influenced by AICPA members and representatives of 
the "Big Eight" firms. (See Appendix H, p. 1423.) 

The organizational support of the AICPA and the "Big Eight" 
firms is vital to the FASB. That support ensures that FASB pro- 
nouncements will be accepted as the authoritative source on accounting 
standards within the private sector. For its part, the SEC has formally 
recognized the FASB as the authoritative source on accounting stand- 
ards which must be used to satisfy the financial disclosure requirements 
of the Federal securities laws. 



CHAPTEK VII. INFLUENCE OF THE OTHEE PRIVATE 
SPONSORING GROUPS ON THE FASB 

In terms of financial, personnel, and organizational support, the 
AICPA and the "Big Eight" accounting firms are by far the most 
substantial influence on the FASB and its activities. The major factor 
which differentiates the FASB from the previous two standard-set- 
ting bodies organized by the AICPA is the participation of other 
private sector groups in the sponsorship of the FASB. 

As has been described, the other private sponsors of the FASB 
play a more limited role than the AICPA in the operation of the 
FASB, but their participation as sponsors is important. It gives the 
FASB an appearance of broad private sector support, while simul- 
taneously removing four influential private groups from the ranks 
of potential FASB critics. The other sponsors also help defray the 
substantial expense of operating the FASB. 

In addition to the AICPA, the four private groups sponsoring the 
FASB are the Financial Executives Institute, the National Associa- 
tion of Accountants, the American Accounting Association, and the 
Financial Analysts Federation.* This subcommittee requested infor- 
mation from each of these groups to determine the interests they 
represent. Their responses to the subcommittee's request are contained 
in Appendix G. 

Collectively, these sponsoring groups and their members contribute 
approximately half of the money used to operate the FASB. That 
amounted to about $2 million in 1975. Contributions to the FASB 
from the various groups and their members are not equal. (A sum- 
mary of their contributions, including a list identifying all of those 
contributing $1,000 or more, appears in Appendix H, p. 1237.) 
Because donations to the FASB are tax deductible, the taxpayer par- 
tially subsidizes these contributions. 

The AICPA organized the FASB in a manner that permits the 
other four private sponsoring groups to nominate a minority of the 
members on the FAF board of trustees, which appoints the seven 
FASB members. The AICPA 's ability to control the FASB was 
assured by vesting the sole authority to elect the members of the FAF 
board of trustees in the AICPA's board of directors. However, the 
other four sponsors have achieved representation on the FAF, the 
FASB, and the FASAC as a result of their nominating role and the 
desire of the AICPA to have the FASB perceived as a broad-based 
venture. 

The FASB has provided this subcommittee with a table showing the 
memberships of the persons on the FAF and the FASB in the various 
groups sponsoring the FASB. (See Appendix H, p. 1263.) The 

* The Securities Industry Association was added as the sixth sponsor of the FASB on 
1 October, 1976. Although added as a sponsoring group too late to be included in this study, 
the Securities Industry Association reportedly represents the interests of more than 800 
investment banking firms. Its addition as an FASB sponsor does not significantly affect the 
findings of this study. 

(158) 



159 

table shows that, in all but two cases, the individuals supposedly 
representing the other four sponsoring groups are also members of 
the AICPA. One FAF trustee and one FASB member belong to 
four of the five sponsoring groups. It is not possible for this subcom- 
mittee to determine which interest is being represented when an indi- 
vidual belongs to more than one sponsoring group. However, the 
large number of individual memberships in the AICPA does indicate 
that the FAF trustees and FASB members are compatible with the 
policies and programs of the AICPA. 

Financial Executives Institute 

After the AICPA, the Financial Executives Institute is probably 
the most important sponsor of the FASB because of the substantial 
amounts of money its members contribute to the FASB. The 1974 
annual report of the FASB states that more than 1,200 corporations 
contributed approximately $1.9 million to support of the FASB in that 
year, and that 80 percent of the corporate total was traceable to the 
efforts of the Financial Executives Institute. That amounts to about 
$1,520,000, or 38 percent of the total contributions in 1974. 

In 1975, 1,397 corporations donated $1,928,349 to the FASB's sup- 
port. Assuming that 80 percent of that amount was again traceable to 
the efforts of the Financial Executives Institute, its members con- 
tributed about $1,543,000 in 1975. That equals 37 percent of the total 
contributions received for FASB operations in 1975. The FASB data 
on corporate contributions in Appendix II at page 1237 shows the 
detail on such contributions for both 1974 and 1975. 

Corporate contributions to FASB support are different in some re- 
spects from the accounting profession's contributions. Apparently, all 
of the corporate donations are made directly to the FAF for operat- 
ing the FASB. There is no intermediary organization — such as the 
AICPA's Accounting Research Association — which collects "dues" 
for donation to the FASB through the FAF. 

Contributions from individual corporations are also much smaller 
in amount than contributions from individual accounting firms. Most 
corporate contributions are less than $5,000. Even such corporate 
giants as American Telephone & Telegraph Company and the Exxon 
Corporation contributed only $40,000 each. Individual corporate con- 
tributions can be lower because there are so many corporations with 
sufficient resources and self-interest to contribute to the operation of 
the FASB. 

The accounting profession's financial resources and direct self-in- 
terest in the reporting of publicly-owned corporations are primarily 
concentrated among a small number of large national accounting 
firms. The vast majority of the Nation's several hundred largest cor- 
porations are audited by only eight accounting firms. As a result, each 
large national accounting: firm must donate a proportionately greater 
amount to support the FASB in order to have the accounting profes- 
sion equal the total contributions from the corporate sector and other 
sources. 

The fact that each of several hundred maior corporations has a 
sufficient self-interest in the FASB to contribute to its operation is re- 
flected by the large number of relatively small corporate contribu- 
tions. Relative to the number of existing and potential corporate con- 



160 

tributors, however, the contributions for the FASB from the corpo- 
rate sector are concentrated among the largest corporations. The data 
provided by the FASB shows that 580 of the Nation's largest corpora- 
tions donated $1,746,984 of the $1,928,349 designated as being contrib- 
uted by the corporate sector in 1975. That amounts to 91 percent of the 
total corporate contributions in 1975. 

Corporate financial support for the FASB is not really so broad- 
based as it first appeal's. There is also a great degree of mutual self- 
interest in the type of accounting standards set by the FASB between 
the large accounting firms and the large corporations which provide 
the bulk of the FASB's financial support. In nearly every case, the 
580 largest corporate contributors are audited by one of the "Big 
Eight" accounting firms. 

The Financial Executives Institute has 9,241 members represent- 
ing approximately 5,000 companies. Membership is on an individual 
basis only, and is open to executives who have major financial re- 
sponsibilities in companies or financial institutions, as well as to 
qualified educators. The Financial Executives Institute had revenues 
of $1,671,909 in 1975, most of which came from membership dues. A 
description of the Financial Executives Institute and its membership 
appears in Appendix G, page 1149. 

One of the Financial Executives Institute's major functions is to 
respond, from the point of view of business, to various agencies of 
the government and to private organizations, such as the FASB, on 
proposed accounting standards and reporting practices and require- 
ments. "A statement by FEI is the view of corporate management," 
says the organization's membership solicitation brochure. The Finan- 
cial Executives Institute is actively involved in promoting the collec- 
tive views of corporate managements before Congress, the SEC, the 
CASB, the IRS, Federal Government departments, the FASB, and 
the stock exchanges. 

Two FAF trustees, one FASB member, and 12 FASAC members 
belong to the Financial Executives Institute. The Financial Execu- 
tives Institute does not contribute directly to support of the FASB, 
but it does undertake an organized effort to encourage the corporations 
employing its members to contribute. As described previously, that 
effort has been very successful. 

The Financial Executives Institute publishes the "Financial Execu- 
tive," a monthly magazine focusing on corporate financial matters, 
and the "FEI Bulletin," which summarizes the organization's activi- 
ties. The related Financial Executives Research Foundation conducts 
studies and publishes reports on topics of interest to the Financial 
Executives Institute. 

Two recent examples of the Financial Executives Institute's efforts 
to influence Congress are included in Appendix G, at pages 1171 and 
1167. The first is a letter sent to the House and Senate conferees on 
the Federal Energy Administration Act. The letter urges the con- 
ferees to reject a Senate amendment which would permit the Federal 
Government to develop accounting practices to be followed by energy 
producing companies. The Financial Executives Institute recommen- 
dation is to leave the development of such accounting standards to the 
private sector's FASB, which it co-sponsors. 

The second example is a letter to Members of Congress concerning 
the retention of a controversial ta^~ provision that benefits multi- 



161 

national corporations. That letter includes the summary of a study 
purporting to show that removal of the tax provision would cause a 
significant loss of jobs within the United States. 

As a sponsor of the FASB, the Financial Executives Institute is 
important because it raises a substantial portion of the money used in 
operating the FASB. It is an active partisan on behalf of business in- 
terests, and openly promotes controversial views on the type of ac- 
counting and financial reporting which should be required of busi- 
nesses. Many of its members represent corporations which are clients 
of the "Big Eight" accounting firms, and share their interest in retain- 
ing accounting standards which permit great flexibility and creativity 
in reporting to investors, creditors, and the public on corporate 
activities. 

The Financial Executives Institute and its members have an obvious 
vested interest in the outcome of the FASB's standard -setting ef- 
forts. The influence which the Financial Executives Institute has on 
the FASB through its substantial financial support and its participa- 
tion in the FASB organization is clearly oriented toward having the 
FASB set accounting standards that are suitable to business interests. 

Many of the corporations of which Financial Executives Institute 
members are leaders have resisted attempts to develop a uniform sys- 
tem of meaningful accounting standards to inform the public ac- 
curately on the results of corporate activities. The participation of 
the Financial Executives Institute as one of the five private sponsors 
of the FASB is another indication of the FASB's inability to foster 
public confidence in the quality of information conveyed by corporate 
financial reports. 

National Association of Accountants 

The National Association of Accountants is an organization dedi- 
cated to promoting the views of its members regarding the use of 
accounting practices. Although the two organizations have somewhat 
different purposes, the membership of the National Association of 
Accountants overlaps the membership of the Financial Executives 
Institute. 

The members of the National Association of Accountants are pri- 
marily corporate controllers, financial executives, and accountants. It 
has about 70,000 members and an annual budget of $4.4 million. Most 
of its revenues come from membership dues. (Detailed information 
on the National Association of Accountants appears in Appendix G, 
page 1173.) 

Since 1972, the National Association of Accountants has directly 
contributed $103,500 for the operation of the FASB. Approximately 
$25,000 has also been spent in soliciting its membership for individual 
contributions. According to the FASB, the National Association of 
Accountants contributed $75,000 toward support of the FASB in 
1975. 

Four members of the National Association of Accountants serve on 
the FAF board of trustees, one as an FASB member, and 10 as 
members of the FAS AC. All of the 15 members of the National Asso- 
ciation of Accountants serving in the FASB organization belong to 
one or more of the other private groups sponsoring the FASB, so none 
of them exclusively represents the National Association of Account- 



162 

ants. However, the National Association of Accountants has desig- 
nated one FAF trustee as the specific representative of its interests. 

The National Association of Accountants actively promotes the 
views of its members on controversial issues before the Federal Gov- 
ernment and private organizations. Its several committees develop its 
views and communicate them to Congress, the CASB, the SEC, the 
IRS and other Federal agencies, as well as the FASB. A list of the 
letters of comment made by the National Association of Accountants 
since January 1, 1975 is included in Appendix G, page 1188. Copies 
of two letters of comment are also included as examples of the positions 
taken by the National Association of Accountants. 

The first letter is to the Subcommittee on Economic Stabilization 
of the House Committee on Banking, Currency, and Housing. In that 
letter, the National Association of Accountants lamented the promul- 
gation of a cost accounting standard by the CASB which requires that 
government contractors use actual useful asset lives when charging the 
Federal Government for depreciation costs. The letter states that 
higher charges to the Federal Government based on rapid write-offs are 
necessary because the profits earned by government contractors are not 
adequate. 

The letter also states that the National Association of Accountants 
"is not concerned with consistency when considering reporting models 
with divergent functions." That statement indicates the National 
Association of Accountants would be a negative influence on any efforts 
by the FASB to develop a uniform system of meaningful accounting 
standards. 

The second letter is to the CASB as comment on its proposal to 
include a portion of return on capital as a "cost" to be charged to 
the Federal Government by private contractors. That proposal has 
since been adopted by the CASB. The National Association of Ac- 
countants concluded that the CASB was not going far enough to 
guarantee that government contractors would earn a profit on all 
Federal contracts. It recommended that inflated replacement values 
be used as the base for computing capital return as a "cost," and that 
the CASB should study ways of increasing contractors' profits. 

Like the Financial Executives Institute, the National Association of 
Accountants and its members have an obvious vested interest in the 
type of standards set by the FASB. The National Association of 
Accountants actively promotes business interests on controversial 
issues, and has pursued those interests through its participation in the 
activities of the FASB. Although it does not have as much influence 
on the FASB as the Financial Executives Institute in terms of finan- 
cial support, the National Association of Accountants and its members 
are substantial contributors to the FASB and wield considerable 
influence on accounting matters. The National Association of Account- 
ants, as a sponsor of the FASB, is committed to corporate interests 
and is ill-suited to provide assurance that the FASB operates 
independently in the public interest. 

American Accounting Association 

The American Accounting Association primarily represents aca- 
demic accountants and others interested in accounting research and 



163 

education. This organization has approximately 12,000 members, 
about 10,000 of whom reside in the United States. Approximately 
4,500 of the members residing in the United States are accounting 
professors at universities and colleges. 

The annual revenues of the American Accounting Association in 
1975 were $645,542. Membership dues accounted for 41 percent of the 
total revenues, with the remainder coming from the sale of publica- 
tions, investment income, and contributions. Almost one- fourth of the 
American Accounting Association's revenues came from contributions 
to the various funds it has established. (A description of its member- 
ship and activities appears in Appendix G, page 1199.) 

The sources and amounts of contributions received by the American 
Accounting xVssociation are shown in its financial statements. Most 
of the $153,820 in contributions was donated by foundations associated 
with the "Big Eight" accounting firms. Many of the American 
Accounting Association's activities are funded in whole or in part with 
contributions from the "Big Eight" firms. 

Because of overlapping memberships, some American Accounting 
Association members are also active in the AICPA. The AICPA's 
incoming chairman of the board, president, and three other AICPA 
board members belong to the American Accounting Association. The 
vice-chairman of the AICPA's Cohen commission, two members of the 
AICPA's "Wheat study that recommended establishing the FASB, and 
four members of the AICPA's Trueblood study on the objectives of 
financial statements are members of the American Accounting 
Association. 

Three American Accounting Association members serve on the FAF 
board of trustees, four serve as FASB members, and 11 serve as 
FASAC members. Of the 18 American Accounting Association mem- 
bers serving in the FASB organizational structure, only one member 
serving on the FASB exclusively represents the American Accounting 
Association. The American Accounting Association contributed $6,876 
for the operation of the FASB in 1975 under a policy of donating $2 
per teaching member who resides in the United States. 

Members of the American Accounting Association form committees 
to comment on proposals by the FASB. Such comments represent the 
views of a majority of the members participating, but expressly do not 
represent the official views of the American Accounting Association. 

As a sponsor of the FASB, the American Accounting Association 
ostensibly does not have a direct vested interest in the type of stand- 
ards set by the FASB, as do the AICPA, the Financial Executives 
Institute, and the National Association of Accountants. The Ameri- 
can Accounting Association also exerts little influence as a source of 
financial support for the FASB. However, the close relationship be- 
tween the American Accounting Association on the one hand, and 
the AICPA and the "Big Eight" accounting firms on the other, raises 
some doubts as to the complete objectivity of the American Account- 
ing Association in co-sponsoring the FASB. Those doubts are 
strengthened by the fact that all but one of the 18 American Account- 
ing Association members serving in the FASB organization are pri- 
marily identified with business interests or other sponsoring groups 
that have a self-interest in the type of standards set by the FASB. 
(See Appendix H, p. 1263.) 



164 

Financial, Analysts Federation 

The Financial Analysts Federation is an organization of 14,000 
members who are primarily engaged in investment analysis and port- 
folio management. It had a budget of $1.4 million in 1975. (A de- 
tailed description of its membership and activities appears in Appen- 
dix G, page 1206.) 

The major activities of the Financial Analysts Federation involve 
the promotion of sound financial analysis and accounting methods. It 
publishes the "Financial Analysts Journal," and has established a 
program of chartered financial analysts to improve the stature and 
practice of financial analysis. It also comments on topics of interest to 
its members before the SEC and the FASB. 

One Financial Analysts Federation member serves on the FAF 
board of trustees, one is an FASB member, and four are FAS AC mem- 
bers. The FAF trustee and two of the four FASAC members repre- 
sent the Financial Analysts Federation exclusively. The Financial 
Analysts Federation contributed $7,000 for the operation of the FASB 
in 1975. but undertook a fundraising campaign among its members 
that yielded $195,625 for the FASB during 1973. 

Of the five private groups sponsoring the FASB, only the Financial 
Analysts Federation and its members have an apparent interest in de- 
veloping accounting standards which clearly convey the results of 
corporate activities to the public. Most of its members are users of cor- 
porate financial statements, and the quality of their investment anal- 
yses is directly related to the quality of information they receive from 
financial statements and other sources. However, some investment 
analysts and portfolio managers may have a vested interest in invest- 
ments which depend on the use of questionable accounting practices to 
create an image of financial success. The Financial Analysts Federa- 
tion appears to have the least influence as a sponsor of the FASB, and 
the FASB has yet to establish the type of meaningful accounting 
standards which would be most beneficial to investors and other users 
of financial statements. 



CHAPTEK VIII. ACTIVITIES OF THE FA SB 

The primary purpose of the Financial Accounting Standards Board 
is to establish accounting standards, but the FASB and its members 
engage in other activities which are intended to promote its interests. 
A review of certain FASB activities indicates that it is not independent 
of its sponsors and their interests, and is therefore not suited to estab- 
lish accounting standards in the public interest. 

Private Meetings 

As part of its efforts to build an image of independence, objectivity, 
and fairness, the FASB developed rules of procedure for establishing 
accounting standards which permit the public to comment on proposed 
standards before they are finally issued. The FASB refers to its rules 
of procedure as evidence for its frequent assertion that it is serving the 
public interest. The SEC has noted that the FASB's procedural rules 
are similar to those of a governmental body, and that the rules followed 
by the FASB in establishing accounting standards are a primary 
reason for the SEC's official recognition of FASB standards. (See 
page 179.) 

On page nine of its 1975 annual report, however, the FASB de- 
scribed a series of private meetings with persons having vested inter- 
ests in the standards set by the FASB : 

In an effort to develop a broader sense of the views of our 
"constituency,'- we are undertaking a series of meetings with 
prominent public accountants, businessmen, and members of 
the academic community. It is anticipated that these meet- 
ings, which are not addressed to specific technical issues, will 
be highly productive in providing us with insight into the 
thinking of these knowledgeable individuals, and with a 
clearer understanding of how we may even better fulfill our 
responsibilities to the public-at-large. 

This subcommittee requested that the FASB provide a list of its 
private meetings with outside parties, along with the purpose and par- 
ticipants at each meeting. The subcommittee also asked if any meetings 
were planned with groups representing interests other than "prominent 
public accountants, businessmen, and members of the academic com- 
munity." The FASB's response to this subcommittee request is in- 
cluded in Appendix H at page 1347. 

A total of 11 meetings had been held with outside parties as of 15 
May, 1976. 

Two of those meetings were with representatives of the FASB's 
sponsoring groups, as well as a few representatives from the Associa- 
tion of Government Accountants and the Institute of Internal Audi- 
tors. The Association of Government Accountants primarily represents 
accountants working for the Federal Government, and the Institute of 

(165) 



166 

Internal Auditors represents accountants working directly for 
businesses. 

Two of the 11 meetings were with representatives of accounting 
firms, and were sponsored by the AICPA. At the first meeting, the 
accounting firms represented were the "Big Eight" and three of the 
next seven largest accounting firms. All of the "Big Eight" and next 
seven largest accounting firms were represented at the second meet- 
ing. The president and other officials of the AICPA were present at 
both meetings. 

Three of the FASB's meetings were held directly with "Big Eight" 
firms — Haskins & Sells (with Honeywell, Inc.). Peat. Marwiek, 
Mitchell & Co., and Arthur Andersen & Co. Another of the FASB's 
meetings was with the "public review board" which Arthur Ander- 
sen & Co. hired to review the quality of the firm's practice. 

The FASB met twice with representatives of major corporations. 
The first was with the Council of Financial Executives of the Con- 
ference Board, and the second was with members of the Financial 
Executives Institute. 

Of the 11 meetings with outside parties held by the FASB, only one 
was with a group not primarily representing the maior accounting 
firms and big; business interests which sponsor the FASB. That meet- 
ing was with two individuals representing financial officials of 
municipalities. 

As of May 15, 1976, the FASB had scheduled three more meetings 
with outside parties which were subsequently held. One was another 
AICPA-sponsored meeting with representatives of medium-sized ac- 
counting firms. The second meeting was with Arthur Young & Co., 
one of the "Big Eight" firms. The third meeting was hosted by the 
Business Roundtable, an influential business lobbying group comprised 
of the chief executives of large corporations. The board chairmen of 
11 of the Nation's largest corporations and banks, along with the vice- 
chairman and president of two others, met with the FASB at a private 
club in New York City. (See Appendix H, page 1421.) 

It is clear that the "constituency" whose views are providing "in- 
sight" for the FASB are almost exclusively major accounting firms 
and bis: business interests. Those are the same interests which sponsor 
the FASB and are its primary financial supporters. The constituency 
being heard in private meetings with the FASB has substantial fi- 
nancial self-interest in the type of accounting standards set by the 
FASB. 

The FASB told the subcommittee that it has arranged meetings 
with outside parties to obtain a broader range of views than is offered 
by the 32-member FASAC. As with the FASAC, however, the views 
sought by the FASB always center on the major accounting firms and 
big business interests that are its sponsors. 

The FASB also said that it does not plan to meet with segments 
of the public who may have interests different from those of "promi- 
nent public accountants, businessmen, and members of the academic 
community." The following reason was given : 

In meeting with the broad range of individuals and orga- 
nizations described above, the FASB's intent is to have direct 
contact with responsible representatives of groups having a 
capability to provide meaningful information and insight 



167 

concerning the establishment of financial accounting stand- 
ards. Therefore, meetings have not been held or planned with 
persons or groups other than those who are knowledgeable 
about the problems and requirements of financial accounting 
and reporting. 

This study has previously described how the establishment of ac- 
counting standards involves social issues which affect the public in a 
broad manner. The failure of the FASB to seek the views of small ac- 
counting firms, local businessmen, consumer groups, small investors, 
creditors, and other segments of the public indicates that the FASB 
is either insensitive to their needs, or has not sought "responsible rep- 
resentatives" of those interests. This subcommittee has found many 
responsible representatives from various segments of the public dur- 
ing the course of its study. Most of them have provided the subcom- 
mittee with meaningful insight concerning the problems and require- 
ments of financial accounting and reporting. 

Regarding its meetings with outside groups, the FASB stated that 
its members and staff meet regularly with the ATCPA's Accounting 
Standards Executive Committee. That committee is dominated by 
the "Big Eight" accounting firms and represents their views. (See 
page 89.) The FASB also stated that its members and staff meet with 
the members and staffs of the SEC and the Cost Accounting Standards 
Board. 

Public Statements 

To publicize the FASB and help gain acceptance for its pronounce- 
ments, the chairman and the vice-chairman have spoken before 
selected groups within the business and financial community. The 
speakers have generally maintained that the FASB is well-suited to 
establish accounting standards, that it is making real progress, and 
that the FASB will not be able to succeed unless all of the various 
financial and business interests give the FASB political support. 
Warnings of Government intervention accompany the plea to help the 
FASB succeed. 

Speeches bv the chairman and vice-chairman of the FASB illus- 
trate the FASB's efforts to build strong political support for its activ- 
ities within the business and financial community. The first example is 
an article entitled "The Financial Reporting Environment" which ap- 
peared in the January, 1976 issue of the "Journal of Commercial Bank 
Lending." It was based on a talk given by the vice-chairman of the 
FASB dnrinof the Fall of 1975 regarding the role and activities of the 
FASB. The noteworthy point in the article is the admission by the 
FASB's vice-chairman that private sector efforts to achieve a mean- 
ingful svstem of accounting standards have failed. "Unfortunately." 
he said, "after almost 40 years of standard setting by a variety of more 
or less authoritative bodies, an established set of objectives does not 
exist." 

He continued bv expressing the hope that the FASB would succeed 
where previous efforts had failed : 

The need for such direction may not be fullv understood by 
anyone who has not been intimately involved in the standard 
setting process, but I can assure you that the need is real — 



168 

indeed, it is critical. Personally, I am impressed and opti- 
mistic about the determination of the seven members of the 
FASB to succeed where our predecessors have failed in estab- 
lishing direction and predictability by means of an explicit 
conceptual framework for financial reporting. 

A similar position had been taken in 1974 by the FASB chairman. 
He addressed the Economic Club of Detroit on the subject: "Stand- 
ards for Financial Keporting : Will Washington Listen to the Private 
Sector?" He described his organization's progress and predicted its 
success. Noting the FASB's close relationship with the SEC, he ex- 
pressed concern that the commission had become too active in deter- 
mining accounting matters that affect the public. The SEC, he sug- 
gested, should "slow down" its efforts in deference to the FASB. 

This year, however, the FASB chairman departed from the positive- 
thinking approach which he and the vice-chairman had followed. His 
speech to the Third Annual Securities Regulation Institute (see Ap- 
pendix H, p. 1398) was different in tone and outlook from his speech 
two years earlier. The chairman admitted that his organization is fail- 
ing to achieve its goal because of political pressures being exerted by 
parties with vested interests in retaining the flexible accounting alter- 
natives which are presently available. 

After reciting a brief history of the manner in which previous 
standard-setting bodies within the private sector had failed, he con- 
cluded that political pressure from vested interests caused the demise 
of the AICPA's Accounting Principles Board, the FASB's immediate 
predecessor. He also recognized that the determination of accounting 
standards involves social issues affecting the public. The chairman 
told of his amazement that only 37 percent of those responding to an 
FASB discussion memorandum agreed with the conclusion that the 
basic objective of financial statements is to provide information use- 
ful for making economic decisions. Twenty-two percent of the re- 
spondents recommended that such a conclusion be rejected out-of- 
hand, and 10 percent insisted that it needed further study. 

One of the most disturbing episodes described by the FASB's chair- 
man was the position taken by the SEC in response to an FASB 
proposal that was opposed by the insurance industry. He told how 
the FASB was advised by the SEC that the commission could not 
support an approach so vehemently opposed by industry. The chair- 
man concluded with the admonition that "if we falter, Government 
stands ready to do for us what we can't do for ourselves." 

Lobbying 

The FASB's 1974 annual report states : "The FASB has neither a 
mandate nor a motive to attempt to influence legislation." Yet the 
FASB has undertaken at least one campaign to lobby Congress and 
influence legislation. 

The FASB successfully sought deletion of a section of the Energy 
Conservation and Oil Policy Act of 1975 which would have directed 
the SEC to establish uniform accounting standards for oil and gas 
companies. That section was necessary because the private sector has 
never developed uniform accounting standards for oil and gas com- 
panies. The FASB opposed the section because it required the SEC 



169 

to set accounting standards directly, rather than relying upon the 
FASB. (See Appendix H, 1334.) 

The FASB notified the House and Senate conferees on the Energy 
Conservation and Oil Policy Act of 1975 that it was undertaking 
a project to establish uniform standards for those companies. The 
FASB wanted three years to complete its project. Congress agreed to 
a two-year development period. 

The FASB's primary argument against having the SEC establish 
accounting standards for oil and gas companies was that the com- 
mission would challenge the general authority of the FASB to estab- 
lish accounting standards. The FASB focused on the "benefits" of the 
special prerogatives which the SEC has granted it. The FASB did 
not express concern over the failure of the private sector to establish 
uniform accounting standards, which was the impetus for congres- 
sional action regarding the accounting standards used by oil and gas 
companies. 

The chairman of the FASB explained his views in his letter to the 
House and Senate conferees : 

The second major concern we have with the requirement 
that the SEC prescribe accounting practices "by rule" is that 
it would seriously disrupt the productive and cooperative 
relationship between public and private sectors that has 
existed for more than four decades, and which has con- 
tributed greatly to progress in financial accounting and 
reporting standards and capital formation. If the SEC rule- 
making procedure were to be imposed on top of our due 
process, the FASB's effectiveness as the standard-setting 
body would be significantly challenged. 

Similarly, a separate letter to conferees from the FAF board of 
trustees praised the "existing framework which has proved successful 
for over 40 years in establishing and improving accounting principles 
and standards." (See Appendix H, p. 1341.) 

These statements praising the "success" of relying upon the private 
sector to establish uniform and meaningful accounting standards 
stand in direct contrast to the admissions by the FASB's chairman 
and vice-chairman in their public statements that the private sector 
has failed to establish such standards. (See page 168.) The FASB 
spoke of success when it was attempting to protect its privileged posi- 
tion from actions by Congress, but it spoke of past failures when it 
was attempting to generate support for its activities from the business 
and financial community. 

On March 9, 1976. the FASB testified regarding the progress of 
its project to establish uniform accounting standards for oil and gas 
companies before the Senate Committee on Interior and Insular 
Affairs. (See Appendix H, p. 1317.) There are two points of par- 
ticular interest in the FASB's testimony. 

The first is that the FASB expects to establish uniform standards 
for oil and gas companies within the two-year development period 
mandated by Congress. Despite its admission that such standards have 
been studied extensively for more than 10 vears. and that its predeces- 
sor, the Accounting Principles Board, had published a research study 
and held a public hearing on the subject, the FASB had originally told 



170 

Congress that three years would be necessary to establish uniform 
accounting standards for oil and gas companies. 

The second point of interest is the recognition by the FASB that 
its primary responsibility in setting accounting standards is to serve 
the public interest. The chairman of the FASB testified: 

We must always be cognizant, however, that our primary 
responsibility is to serve the public interest. That is the stand- 
ard against which the success of our work will ultimately be 
judged. 

Despite its expressed intent to serve the public, the FASB has re- 
lied upon its usual procedures in developing uniform accounting 
standards for oil and gas companies. The FASB testified that it has 
followed its normal practice by appointing an 18-member task force 
of knowledgeable individuals to draft the FASB's discussion memo- 
randum on accounting standards for oil and gas companies. 

As previously described on page 146 of this study, however, that task 
force is comprised almost entirely of representatives from big oil, gas, 
and mining companies, their "Big Eight'- auditors, and large institu- 
tional investors with significant holdings in those companies. Almost 
all of the task force members have an apparent conflict of interest in 
the work being performed for the FASB. The composition of the task 
force does not support the FASB's claim that its primary respon- 
sibility is to serve the public interest. 

Accounting Standards 

The FASB became the private sector's authoritative body for set- 
ting accounting standards on 1 July, 1973 when it succeeded the 
AICPA 's previous standard-setting body, the Accounting Principles 
Board. Since that time, the FASB has been establishing accounting 
standards in accordance with its elaborate procedures designed to give 
the appearance of meaningful public participation in the standard- 
setting process. 

Despite the fact that it is merely a better organized and funded 
version of previous AICPA efforts to establish accounting standards 
within the private sector, the FASB and its sponsors maintain that 
it is making real progress in bringing uniformity and more meaning 
to the body of accounting standards used bv businesses in reporting 
their financial results to the public. The FASB takes pride in its pro- 
cedures for recognizing accounting problems and dealing with the 
most important ones on a priority basis. The FASB views itself as 
the solution to difficulties which have prevented establishment of uni- 
form and meaningful accounting standards in the past. 

This study has already shown that there is no reason to expect that 
the FASB will act against the private interests which control it. Those 
special interest groups have had the opportunity to establish uniform 
and meaningful accounting standards for 40 years, but have resisted 
attempts to achieve that goal. A review of the accounting standards 
established by the FASB during the past three years shows that it is 
following in the same direction as previous AICPA standard-setting 
bodies. 

During its three-year existence, the FASB has issued 12 "State- 
ments of Financial Accounting Standards." Those standards have 



171 

addressed accounting problems of varying significance, but they have 
not resolved such problems in a manner which results in meaningful, 
as well as uniform, treatment of specific business transactions. Nor 
have they seriously threatened the accounting prerogatives of various 
special interest groups in the business community. 

FASB Statement No. 2, "Accounting for Eesearch and Development 
Costs," ruled that such costs must be charged against income as they 
occur. This ruling primarily affected small, developing companies by 
reducing the earnings they could report to investors in the early years 
of a major research project. Most large corporations were already 
charging research and development costs against current income. 

The FASB ruling included a provision that spared the few large 
corporations, such as Lockheed Aircraft Corporation and McDonnell- 
Douglas Corporation, which stood to be seriously affected by writing 
off accumulated research and development costs against current in- 
come. It permitted companies to restate their earnings in previous 
years to reflect research and development costs incurred, but not origi- 
nally charged against income in those years. That provision enabled 
companies to avoid a disastrous decline in their current annual earn- 
ings, but was inconsistent with a preferred accounting practice — cur- 
rently proposed by the FASB as a rule — that all adjustments should 
be reflected in current income at the time they are made. 

In Statement No. 7, "Accounting and Reporting by Development 
Stage Enterprises," the FASB ruled that developing companies must 
adhere to the same standards as fully established companies. By pro- 
hibiting the use of special standards for developing companies, the 
FASB helped to solidify the competitive position of established com- 
panies against potential major competitors in the development stage. 
Promulgation of this standard was a benefit, rather than a threat, to 
the established corporations and accounting firms which are the 
primary sponsors of the FASB. 

The FASB failed to establish uniform accounting treatment of 
business transactions in two important standards which were issued. 
In Statement No. 9, "Accounting for Income Taxes — Oil and Gas 
Producing Companies," the FASB permitted oil and gas companies a 
choice of two methods for reporting interperiod tax allocations. 
It failed to require the use of a single method even though this 
accounting problem was precipitated by the Tax Reduction Act of 
1975, and entrenched use of multiple accounting methods was not a 
significant consideration. 

The standard promulgated in Statement No. 12, "Accounting for 
Certain Marketable Securities," also failed to establish uniformitv. 

« 

The FASB ruled that changes in value of marketable equity securities 
must be included in determining net income, but only when such 
securities are classified as "current assets." Changes in value of market- 
able equity securities not classified as "current assets" and marketable 
debt securities were not covered by this ruling, and may be reported 
using alternative accounting methods. 

Furthermore, the FASB specifically provided that specialized in- 
dustry accounting practices with respect to marketable equity securi- 
ties may continue to be used by investment companies, brokers and 
dealers in securities, stock life insurance companies, and fire and 
casualty insurance companies. Such companies are some of the largest 



67-159 O - 77 - 13 



172 

holders of marketable securities. By permitting them to use specialized 
accounting practices, the FASB assured that the earnings of many 
companies most in need of this accounting reform would not be 
affected by its coverage. 

The goal of establishing a system of uniform and meaningful 
accounting standards has so far remained as elusive as ever under the 
direction of the FASB. It is currently in the process of issuing 
final accounting standards on such important matters as accounting 
for leases, accounting for business combinations, and financial report- 
ing by segments of a business. Standards issued previously by the 
FASB indicate that it will not take the decisive action necessary to 
correct abuses in those areas of financial accounting and reporting. 



CHAPTER IX. ACCOUNTING RESPONSIBILITIES OF THE 
SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission has important respon- 
sibilities regarding the development and application of financial ac- 
counting standards used by corporations which must report to the 
SEC and the public under the requirements of the Federal securities 
laws. 

In the Securities Act of 1933 and the Securities Exchange Act of 
1934, Congress directed the SEC to protect the public from false and 
misleading information by requiring publicly-owned corporations to 
disclose financial and other information in a manner which accurately 
depicts the results of corporate activities. Congress gave the SEC 
broad authority to establish accounting and reporting standards as 
part of its mandate to administer and enforce the provisions of the 
Federal securities laws. 

A review of the SEC's record on accounting and reporting matters 
shows clearly that it has seriously failed to protect the public interest 
and fulfill its congressional mandate. 

Authority axd Responsibility 

Having created the SEC to ensure that proper accounting and re- 
porting standards were instituted. Congress required that corporate 
financial statements be certified by independent auditors as a means 
of providing independent assurance to the public that proper account- 
ing and reporting standards were in fact being used by individual 
corporations. 

At the request of this subcommittee, the SEC prepared a brief sum- 
mary of its authority and responsibility to establish accounting stand- 
ards, and to compel compliance with such standards. (See Appen- 
dix I, page 1450.) 

That summary describes the broad authority given to the SEC 
by Congress, both to establish accounting standards used by publicly- 
owned corporations, and to require that such corporations and their 
independent auditors adhere to the standards established by the SEC* 
The requirement that financial statements of publicly-owned corpora- 
tions be certified by independent auditors is also described. 

Thus, independent auditors share the SEC's responsibility to the 
public. Their role in assuring compliance with the provisions of the 
Federal securities laws is essentially a public service role which Con- 
gress might very well have assigned to the SEC or some other govern- 
mental authority. 

The summarj' of accounting authority and responsibility prepared 
by the SEC describes the close relationship that has developed between 

♦The SEC issues accounting releases as a means of stating its policies or findings on 
certain accounting matters. The SEC has provided this subcommittee with a list of such 
accounting releases which its chief accountant considered particularly important. (See 
Appendix I, page 1446.) 

(173) 



174 

the SEC and the AICPA, which is controlled by the "Big Eight" and 
other large national accounting firms. It also illustrates the role rever- 
sal which the SEC has deliberately permitted to occur in failing to 
exercise its congressional mandate. Instead of sharing compliance 
responsibilities with independent auditors following standards estab- 
lished by the SEC to protect the public, the SEC has acquiesced in 
permitting the AICPA to establish auditing and accounting standards 
directly on behalf of the accounting profession. 

This study has previously described the organization and activities 
of the AICPA which make it unfit to establish auditing and accounting 
standards in the public interest. Similarly, the "Big Eight" accounting 
firms have been shown to lack independence as auditors because of their 
involvement with the interests and business affairs of their big corpo- 
rate clients. The SEC has nevertheless delegated to the AICPA, as the 
designated representative of the accounting profession, its responsi- 
bility under the Federal securities laws to determine the propriety of 
accounting standards. 

The SEC summary states : 

The Federal securities laws and the Commission's rules, 
however, are consistent with the view that primary respon- 
sibility should rest with the accounting profession itself to 
audit registrants' financial statements in accordance with the 
standards of the profession and to report on whether the 
financial statements are presented in conformity with gen- 
erally accepted accounting principles established by the pro- 
fession The accounting standards or principles of the 

accounting profession, which are known as generally 
accepted accounting principles, have been promulgated by 
committees or boards appointed or sponsored by the Ameri- 
can Institute of Certified Public Accountants. (Emphasis 
added.) 

With respect to the FASB, the commission has repeated its decision 
to permit the AICPA to determine the public interest under £he 
Federal securities laws : 

The FASB was created based on the recommendations of a 
study group established by the AICPA and chaired by 
former SEC Commissioner Francis M. Wheat. That group, 
after public hearings and considerable research, concluded 
that accounting principles could best be set by a full-time 
body in the private sector. (Emphasis added.) 

The extraordinary degree to which the SEC has abdicated its 
responsibility to protect the public under the provisions of the Federal 
securities laws is evidenced by these statements. The SEC speaks 
of standards developed by the accounting profession, and conclusions 
reached by a private interest study group as to the best methods of 
setting accounting standards. No mention is made of the clear man- 
date expressed by Congress in the Federal securities laws that the 
public should be protected from false and misleading information. 
Congress vested the SEC with direct responsibility and authority 
to achieve that result. The Federal securities laws do not mention the 
AICPA, its predecessors, or the view that primary responsibility to 
determine proper accounting standards should rest with the account- 
ing profession itself. 



175 

The SEC has failed to exercise the extensive powers given it by 
Congress. Instead, it has relied upon self-interested private groups to 
establish accounting standards that greatly affect the public, but are 
not designed to protect it. As a result, the public has suffered severe 
economic losses from the continuous use of accounting standards es- 
tablished by private interests which permit publicly-owned corpora- 
tions to report financial information which may be false and mislead- 
ing. This study includes materials describing the types of accounting 
abuses which have occurred. (See p. 188.) 

Congress has found itself relying on questionable financial informa- 
tion as the basis for determining certain Federal policies. According to 
Professor Abraham J. Briloff, the SEC, along with the General Ac- 
counting Office, has failed to require that Lockheed Aircraft Corp. use 
prudent accounting standards. Professor Briloff states that accounting 
standards presently used by Lockheed with the tacit approval of the 
SEC result in misleading financial statements. The financial state- 
ments of Lockheed Aircraft Corp. are of special interest to the Federal 
Government because of the company's Federal loan guarantee. (See 
Appendix K, page 1605.) 

For almost 40 years, the SEC has defended the accounting profes- 
sion's authority to establish accounting standards. When Congress 
considered directing the SEC to establish uniform accounting stand- 
ards for oil and gas companies, the SEC joined with the FASB and the 
AICPA in lobbying Congress to leave the establishment of such stand- 
ards to the FASB. (See Appendix I, page 1437.) The views of the SEC 
were stated in its letter of 3 October, 1975 : 

We believe strongly that the current standard-setting ap- 
paratus is a good one and should not be upset. Because the 
FASB is a recently created organization, care must be taken 
that its credibility is not eroded. We believe that a statutorily 
required governmental rulemaking procedure at this time to 
establish accounting standards by rule would seriously impair 
the effectiveness of the board. 

The SEC stated its concern about actions by Congress which might 
threaten the FASB's authority, but did not express similar concern 
over the failure of the FASB and its predecessors to establish proper 
accounting standards for oil and gas companies during the past 40 
years. Nor did the SEC comment on its own failure to establish such 
standards, or to require that they be established. The primary concern 
of the SEC has been to protect the privileged position of the AICPA 
and its standard-setting bodies, rather than to protect the public from 
improper accounting practices. 

Finally, it should be noted that the SEC has chosen to rely upon 
the auditing standards established by the AICPA on behalf of the 
accounting profession, as well as the accounting standards which are 
established by the FASB. Although the SEC has no procedures de- 
signed to verify whether independent auditors are performing their 
duties properly, it opposed legislation which would have enabled 
the General Accounting Office to verify the accuracy of independent 
audits for oil and gas companies. (See Appendix I, page 1435.) The 
failure of the SEC to support verification of work performed by in- 
dependent auditors is of special concern due to widespread revela- 



176 

tions of corporate wrongdoing which was not discovered by inde- 
pendent auditors. 

Accounting Series Release 150 

The SEC delegated its public authority and responsibility to pri- 
vate interests through issuance of Accounting Series Release No. 150. 
(See Appendix I, page 1433.) ASR 150, issued on 20 December, 1973, 
restated the SEC's basic policy of relying upon accounting standards 
developed in the private sector which have "substantial authoritative 
support." That policy was first stated by the SEC in 1938 through is- 
suance of ASR 4. However, ASR 150 went one step further by spe- 
cifically designating the AICPA-sponsored FASB as the official body 
in the private sector to establish accounting standards that are recog- 
nized by the SEC as having "substantial authoritative support." 

A brief description of the process by which the SEC has come to 
rely upon the AICPA and FASB is included in this study at page 131. 
Professor Robert Chatov has provided a well-documented description 
of the SEC's reliance upon the private sector in his book, "Corporate 
Financial Reporting — Public or Private Control?" (See page 130.) 
Additional insights and illustrations are included by Professor Abra- 
ham J. Briloff in his two books, "Unaccountable Accounting" and 
"More Debits Than Credits." (See page 68.) 

In ASR 150, the SEC attempted to justify its delegation of public 
authority to private interests by several statements which raise seri- 
ous questions regarding the ability and resolve of the SEC to fulfill 
its responsibilities under the Federal securities laws. Those statements 
demonstrate an astounding willingness and determination by a Fed- 
eral agency to rely upon the industries and professionals it regulates 
to establish public policies that significantly affect their financial 
status. The SEC has simply ignored the clearly apparent conflicts of 
interest, shown in this study, which are associated with the system of 
establishing accounting standards approved by the SEC. 

The SEC chose to continue its policy of rely ins: upon standard- 
setting bodies established by the AICPA, and concluded : 

The determinations by these bodies have been regarded 
by the Commission, with minor exceptions, as being respon- 
sive to the needs of investors. 

Through the use of AICPA-developed accounting standards which 
the SEC believes have been responsive to the public, a vast array of 
abuses has occurred as a result of false and misleading financial state- 
ments that were reported to the public as accurate representations of 
corporate business activities. (See page 188.) Accounting standards 
established by the AICPA have permitted corporations to use any of 
several available alternative standards to account for the same type 
of business transaction. (See page 134.) Even the present chairman of 
the FASB, a former AICPA president, has recognized the failures of 
the AICPA's standard-setting efforts. (See page 168.) 

In ASR 150, the SEC noted that the FASB was created upon the 
recommendation of an AICPA study group, and has been widely en- 
dorsed by industry, financial analysts, accounting educators, and prac- 
ticing accountants. As described previously on page 133, that "broadly 
based study group" was carefully selected and financed by the AICPA, 



177 

which had an obvious self-interest in the study group's recommenda- 
tions. It is not surprising that the study group recommended that 
establishment of accounting standards be left to the private sector 
under the AICPA-controlled FASB. 

It is also not surprising that private business and accounting organi- 
zations which were permitted to join in the operation and sponsorship 
of the FASB have supported it. However, this study has shown that 
financial and organizational support for the FASB is narrowly con- 
centrated among large corporations and their "Big Eight" auditors 
which primarily benefit from the present system of flexible, alterna- 
tive accounting standards. 

The SEC presented some remarkable reasons for endorsing the 
FASB. None of them supports the SEC's conclusion that the FASB 
will promote the interests of the public : 

The Commission endorsed the establishment of the FASB in 
the belief that the board would provide an institutional frame- 
work which will permit prompt and responsible actions flowing 
from research and consideration of varying viewpoints. The col- 
lective experience and expertise of the members of the FASB 
and the individuals and professional organizations supporting 
it are substantial. Equally important, the commitment of resources 
to the FASB is impressive evidence of the willingness and in- 
tention of the private sector to support the FASB in accomplish- 
ing its task. In view of these considerations, the Commission 
intends to continue its policy of looking to the private sector for 
leadership in establishing and improving accounting principles 
and standards through the FASB with the expectation that the 
body's conclusions will promote the interests of investors. 
Although the FASB does provide an "institutional framework" for 
establishing accounting standards, the FASB organization and its 
decision-makers are drawn from, and controlled by, the AICPA and 
other self-interested private groups. FASB members do have substan- 
tial expertise and experience on accounting matters, and certain mem- 
bers of the sponsoring groups have contributed substantial financial 
resources to operating the FASB. However, their experience and re- 
sources are more than matched bv their self-interest in the standards 
set by the FASB. 

Experience, expertise, and financial resources are not the sole meas- 
ures for determining the competence of an organization to establish 
accounting standards in the public interest. The most important meas- 
ure of competence must be a valid claim to represent the public interest 
above all others. The AICPA-controlled FASB does not meet that 
test. 

Finally, the SEC approved all past and future pronouncements bv 
the FASB through the following statement in ASK 150: 

For purposes of this policy, principles, standards and prac- 
tices promulgated by the FASB in its Statements and Inter- 
pretations will be considered by the Commission as having 
substantial authoritative support, and those contrary to such 
FASB promulgations will be considered to have no such 
support. 



178 

The SEC thus established that accounting standards set by the 
FASB must be followed by all publicly-owned corporations, and that 
the standards set by this private organization, subject to minor excep- 
tions, are the only standards which may be used. 

Arthur Andersen & Co. has challenged the SEC's extraordinary 
delegation of authority to the FASB as an illegal avoidance of Fed- 
eral administrative procedures. (See page 56.) In response, the SEC 
requested public comment on the charges made by Arthur Andersen 
& Co. (See Appendix I, page 1429.) The Arthur Andersen & Co. com- 
plaint recognizes ASR 150 for what it is — an attempt by a Federal 
agency to require the public to follow rules promulgated by a private 
organization without regard to procedural due process of law which 
is mandated by the Administrative Procedures Act. 

Arthur Andersen & Co. sought a preliminary injunction in Federal 
court to prohibit the SEC from enforcing its accounting policies 
stated in ASR. 150. In denying the injunction, the Federal District 
Court failed to recognize that the SEC, in approving accounting rules 
which have the force of law, has not satisfied proper procedural re- 
quirements. (See Appendix I, page 1547.) It may be necessary for 
Congress to exercise its legislative authority over the SEC to correct 
the adverse effects of the SEC's accounting policy stated in ASR 150. 

Adverse Effects 

Other adverse consequences of ASR 150 are : 

The FASB and the AICPA have full control over their 
rules of procedure, and there is no requirement that those 
rules protect the public. Previous case law indicates that the 
FASB and the AICPA cannot be sued by damaged parties for 
failing to adopt or follow proper rules of procedure because 
they are private organizations. 

There is no requirement, such as imposed on Federal ad- 
visory committees, that the FASB, the AICPA, or any of 
their task forces or committees be fairly balanced as to the 
views represented by their members, or that they deliberate in 
public session as multi-member Federal agencies and com- 
missions must soon do under the "Sunshine" Act (P.L. 94- 
409.) This study shows that the FASB, the AICPA, their 
task forces, and committees are not balanced as to the views 
represented by their members, and that they do not meet in 
public. 

There is no process for assuring that members of the FAF, 
the FASB, and senior staff are suitable to establish account- 
ing standards in the public interest. This study shows that 
almost all of those involved in the FASB organization are ill- 
suited to serve the public interest because of their business 
affiliations, their self-interests and their manner of selection. 

The SEC has essentially permitted the FASB's private 
sponsors to exercise all of the powers which are traditionally 
divided among three branches of Government. They exercise 
legislative authority through the FASB by establishing the 
standards they must follow. They exercise executive authority 
by applying accounting standards the FASB has established 



179 

to individual corporations. They are subject to no effective 
judicial review of their standards because the SEC has de- 
creed in advance through ASR 150 that accounting standards 
established by the FASB are acceptable. Thus, the private 
sponsors of the FASB operate without effective checks and 
balances on their authority to establish and apply accounting 
standards. 

The SEC presently attempts to influence auditing stand- 
ards by threatening to act in certain areas if the AICPA does 
not issue its own standard first, and then withdraws when the 
AICPA issues a standard acceptable to the SEC. (See Ap- 
pendix I, page 1444.) That is neither an efficient nor an 
appropriate method of regulation. 

Relationship With the AICPA and the FASB 

In keeping with its expressed determination to have the FASB 
establish accounting standards under the provisions of the Federal 
securities laws, the SEC described the mere oversight role it has re- 
served for itself in the summary of its responsibilities which was pre- 
pared for this subcommittee. (See Appendix I, p. 1450.) The SEC 
said: 

The Commission, through its chief accountant, has maintained 
oversight of the Financial Accounting Standards Board and its 
predecessor standard-setting bodies, with respect to the relation- 
ship between the work of these bodies and the Commission's re- 
sponsibility to insure appropriate disclosure in financial state- 
ments filed pursuant to the Federal securities laws. This is ac- 
complished by consultations and close liaison with the board on 
its ongoing projects and its deliberations on new projects. The 
Commission has noted with favor that the administrative pro- 
cedures adopted by the board with respect to study and research, 
public hearings, and solicitation of comments on proposals in the 
process of development and issuance of accounting standards are 
similar to the procedures followed by the Commission in rule- 
making. 
The SEC's praise of the FASB's procedures fails to recognize the 
conflicts of interest involved with the FASB members who make the 
actual decisions on accounting standards. Certain of the FASB's pro- 
cedures are questionable or inadequate. (See pages 147 and 165.) The 
insistent willingness of the SEC to delegate its authority to establish 
accounting standards to the private standard-setting bodies sponsored 
by the AICPA illustrates the close relationship which has developed 
between them. 

The SEC appoints representatives from the AICPA and the "Big 
Eight" firms to important Federal advisory committees. For example, 
representatives from all of the "Big Eight" firms were appointed to 
the SEC's advisory committee on replacement cost data which will 
help develop guidelines for implementing that controversial reporting 
requirement. (See Appendix I, page 1445.) The SEC also appointed 
a partner in one "Big Eight" firm, and a former partner in another 
"Big Eight" firm, to its advisory committee on corporate disclosure. 
An important factor in the SEC's close relationship with the 
AICPA and the FASB is that the chief accountants at the SEC have 



180 

long been members of the AICPA. The chief accountant of the SEC 
exercises great influence over its decisions and policies on accounting 
matters because of his administrative authority and his relationship 
with the SEC commissioners. 

In addition to membership in the AICPA, the immediate past chief 
accountant of the SEC was employed as a consultant to Arthur 
Young & Co., one of the "Big Eight" firms, prior to accepting ap- 
pointment to the top accounting position at the SEC. 1 His predecessor 
was the SEC's chief accountant for many years, and was hired as a 
consultant by the AICPA at an annual rate of $60,000 subsequent to 
his retirement from the SEC. (See Appendix E, page 924.) The 
present associate chief accountant of the SEC is also a member of the 
AICPA. 

A close working relationship has developed with the AICPA and 
the FASB in order to help the SEC use its public authority to enforce 
auditing and accounting standards established by those private interest 
groups. When a Federal agency delegates its public authority to pri- 
vate interest groups, those groups necessarily become involved in the 
operations of the Federal Government. 

Enforcement of Professional Standards 

The SEC has broad authority to enforce proper standards of con- 
duct for independent auditors because of the important public service 
function such auditors perform within the framework of the Federal 
securities laws. Congress specifically provided that independent audi- 
tors would assist the SEC in protecting the public by assuring that 
individual corporations were complying with accounting and report- 
ing standards. 

After receiving complaints that individual CPAs and small account- 
ing firms are treated unfairly by the SEC, the subcommittee staff re- 
viewed the SEC's procedures designed to ensure that independent 
auditors perform their responsibilities properly. The staff's review 
of SEC disciplinary proceedings against independent auditors since 
1969 showed that individual CPAs and small accounting firms ap- 
parently were treated more harshly than large national accounting 
firms by the SEC. The subcommittee asked the SEC to explain its 
uneven application of enforcement sanctions. The SEC response raises 
questions about its disciplinary program. (See Appendix I, page 
1467.) 

The SEC response emphasizes that its primary enforcement proce- 
dure, a Rule 2(e) proceeding to determine the fitness of an independent 
auditor to practice before the SEC, is remedial rather than punitive in 
nature. Nevertheless, disciplinary sanctions against individual CPAs 
and small accounting firms have included public identification of the 
offending individuals, as well as permanent disqualification from prac- 
tice before the SEC. 

Offending individuals in lanre national accounting firms have not 
been identified to the public. Disciplinary sanctions usually have re- 
quired only that external quality reviews 2 be conducted and, occa- 
sionally, a short temporary suspension from accepting new clients. 



1 At the time this study was written, the SEC's chief accountant had just resigned to 
accept a position with the City of New York and no successor had been named. 

2 In a quality review, outside parties examine the internal policies and procedures of an 
accounting firm to determine whether those policies and procedures adequately assure that 
the firm's quality of practice will satisfy required standards. 



181 

The discrepancies in the SEC's disciplinary procedures are most 
apparent in regard to the three "Big Eight" firms which have been 
disciplined by the SEC — Arthur Andersen & Co., Peat, Marwick, 
Mitchell & Co., and Touche Ross & Co. None of the individual of- 
fenders was named, and the SEC agreed to the participation of CPAs 
from other large accounting firms in quality reviews, the results of 
which were kept confidential. The mild sanctions imposed by the SEC 
are especially significant because the SEC found that partners from 
Arthur Andersen & Co. and Peat, Marwick, Mitchell & Co. inten- 
tionally misled the SEC's staff in its investigations. 3 

Moreover, the SEC has continually relied on quality reviews con- 
ducted under the auspices of the AICPA, which is controlled by the 
"Big Eight" and other large national accounting firms. The AICPA 
also promulgates auditing and ethical standards which are recognized 
by the SEC. The SEC has essentially permitted the large national ac- 
counting firms to formulate the standards to which they should be 
held through the AICPA, and to participate in confidential quality 
reviews of one another to assure the SEC that they are performing 
their responsibilities adequately. 

In its response to this subcommittee, the SEC defended its uneven 
application of disciplinary sanctions by saying that it would be un- 
fair to punish innocent members of large accounting firms by impos- 
ing harsh sanctions. Similarly, the SEC said that it is unnecessary 
to name or discipline individuals in order to correct accounting abuses 
by large firms. The SEC stated that its methods provide "some as- 
surance" that problems encountered in large accounting firms are cor- 
rected, and declined to identify individual offenders in past cases 
because they were not originally charged with violations. 

The SEC's attitude toward disciplining large firms definitely bene- 
fits partners of such firms because they are held to a lesser degree of 
professional accountability. CPAs in large firms apparently need not 
fear professional damage or embarrassment from having their individ- 
ual identities disclosed to the public in association with SEC discipli- 
nary actions against their firms. Large firms also are apparently safe 
from losing the privilege to practice before the SEC because of the im- 
pact on innocent partners and clients. With no need to fear personal 
embarrassment or loss of their firm's privilege to practice, partners of 
large firms primarily risk only adverse publicity resulting from 
having their firm disciplined by the SEC. 

There is, of course, no requirement that CPAs join large accounting 
firms, or that large firms must practice before the SEC. They appar- 
ently choose to do so because of the substantial financial benefits in- 
volved. They should then be prepared to accept the responsibilities 
that accompany those benefits. Because they are independent auditors 
for large corporations which have great impact on the public, CPAs 
in large firms should be held to standards of accountability that are at 
least as stringent as those imposed on individual CPAs and small 
accounting firms. 

One major defect in the SEC's enforcement procedures is the lack 
of procedures to check periodically the work of independent auditors 

3 The texts of the SEC's disciplinary statements against these three firms are referenced 
in the sections describing each "Big Eight" firm individually. (See p. 54.) 



182 

for accuracy, competence, and thoroughness. At present, the SEC gen- 
erally is able to act only after abuses and resulting damages have al- 
ready occurred. Public confidence in the ability of independent 
auditors to perform their important responsibilities would undoubt- 
edly be increased significantly by periodic quality reviews. Many ac- 
counting abuses could thus be avoided. 

As described previously on page 114, quality review programs con- 
ducted by the AICPA and the "Big Eight" accounting firms are 
inadequate because of the obvious conflicts of interest involved. 
Periodic Federal quality inspections in such diverse areas as food and 
drug manufacturing and pollution control systems have proven to be 
useful and effective. Numerous abuses in auditing and accounting have 
caused extensive damage to the public, and demonstrate a real need 
for the SEC or another government agency to inspect periodically 
the work of independent auditors operating under the provisions of 
the Federal securities laws. 

"Hochfelder" Decision 

The United States Supreme Court adversely affected the oppor- 
tunity for individuals to recover damages from errant accountants in 
Ernst & Ernst v." Olga Hochfelder, et al., 96 Sup. Ct. 1375 (March 30, 
1976). In that case, the Court held that "scienter" — the intent to de- 
ceive, manipulate, or defraud — is a necessary requirement of any 
private action for damages under the fraud provisions of the Federal 
securities laws. Thus, independent auditors are apparently liable to 
damaged individuals only when it can be proved that they intention- 
ally performed a faulty audit or certified incorrect information. Inde- 
pendent auditors would not be liable for negligent or incomplete 
audits which result in damages to innocent investors relying upon 
certified corporate financial statements. 

In his dissent to the Hochfelder decision, Justice Blackmun was 
joined by Justice Brennan in urging Congress to amend the Federal 
securities laws to permit damaged individuals to sue negligent account- 
ants. Because the SEC had also taken the position that independent 
auditors should be liable for their negligence, this subcommittee 
requested the SEC to analyze the effect of the Hochfelder decision, and 
to recommend to Congress what legislative action was necessary to 
restore protection to investors from negligence by accountants. (See 
Appendix I, page 1479.) 

After more than three months of consideration, the SEC responded 
to this subcommittee that it presently is unable to recommend what 
legislative action, if any, should be taken to achieve the reform thought 
necessary by Justices Blackmun and Brennan. (See Appendix I, 
page 1482.) The SEC's response does include a detailed analysis of 
existing cases which may be affected by the Hochfelder decision, as 
well as a copy of the decision itself. 

It is important to establish the right of damaged individuals to sue 
accountants for negligence under the fraud provisions of the Federal 
securities laws. Private actions for damages have been instrumental in 
the enforcement and prevention of securities fraud, thus reducing the 
regulatory burden on the SEC while providing relief to those who 
deserve it. The SEC does not have the resources to detect and halt 



183 

negligence by independent auditors in most cases, and the SEC has no 
power to order reimbursement of individuals who have been damaged. 
The SEC analysis of the Hochf elder decision suggests that it is 
unnecessary to restore private actions for damages because the SEC 
has other means to ensure that independent auditors perform ade- 
quately, most notably the Rule 2(e) proceedings previously described. 
(See page 180.) But Rule 2(e) proceedings do not order reimburse- 
ment of individuals who have been damaged. The SEC's close relation- 
ship with the AICPA and the large national accounting firms does not 
instill public confidence in the resolve of the SEC to police vigorously 
the practice of independent auditors. The SEC's record of mild disci- 
plinary sanctions against large accounting firms indicates that the 
public should have a direct means under the Federal securities laws to 
hold independent auditors responsible for their negligence. 



CHAPTER X. THE COST ACCOUNTING STANDARDS 

BOARD (CASB) 

Congress created the Cost Accounting Standards Board, a Federal 
agency, in 1970 "to promulgate cost-accounting standards designed to 
achieve uniformity and consistency in the cost-accounting principles 
followed by defense contractors and subcontractors under Federal 
contracts." Approximately $20 billion of Federal defense contracts 
annually are subject to standards promulgated by the CASB, accord- 
ing to a summary of its statutory authority and powers which it 
prepared for this subcommittee. (See Appendix J, page 1563.) 

The General Services Administration in its Federal Procurement 
Regulations has, as a matter of policy, extended the CASB's require- 
ments to major negotiated contracts of civilian agencies. Thus, the 
impact of standards issued by the CASB spreads throughout the 
Federal Government on contracts aggregating far more than $20 
billion annually, although no precise figure is available. 

Decisions by the CASB significantly affect amounts charged to the 
Federal Government as "costs" by contractors. Private contractors 
seek to maximize amounts designated as "costs" under Federal con- 
tracts because it generally increases payments received from the Fed- 
eral Government. Contract "costs" are often subject to escalation 
clauses as well. The CASB determines what are "costs" under Federal 
contracts. 

The CASB establishes cost accounting standards in a manner which 
is essentially similar to the FASB's process for establishing financial 
accounting standards used in reporting the results of business activ- 
ities to the public. Both have technical staffs and procedures to ensure 
that proposed standards are well-researched and subjected to public 
comment. Members of the CASB and the FASB exercise the same 
type of analysis in reaching decisions on accounting standards in their 
respective areas. 

As stated in the CASB's 1976 Progress Report to the Congress : 

Accounting for the costs of Government contracts often 
deals with the same expenditures and the same problems of 
assigning costs to time periods as are of interest in financial 
and income tax accounting. 

Organization and Resources 

The composition and status of the CASB were specifically set forth 
in the legislation creating it. The Comptroller General of the United 
States, who heads the General Accounting Office, serves as the chair- 
man of the five-member board. He appoints the other four members 
to four-year terms. Two of the appointed members must be from the 
accounting profession, with one being particularly knowledgeable 
about the cost accounting problems of small businesses. Of the remain- 
ed) 



185 

ing two appointed members, one must be representative of industry, 
and the other must be from a department or agency of the Federal 
Government. 

Although appointed by the Comptroller General, who is a Federal 
official, three of the five board members — a majority — are required by 
statute to be chosen from industry and the accounting profession. 
Members of the CASB serve part-time, so the three members from 
industry and the accounting profession retain their affiliations with 
the private interests they represent. The business activities of those 
members may be directly affected by standards promulgated by the 
CASB. 

The procedures for selecting CASB members provide some assur- 
ance that the public interest will be represented in the decision-making 
process. The procedures for selecting FASB members provide no such 
assurance. However, the requirement that a majority of CASB mem- 
bers represent self-interested private groups raises serious questions 
concerning the CASB's ability to act truly on behalf of the public. 

The CASB was established by statute as "an agent of the Con- 
gress . . . which shall be independent of the executive departments . . ." 
The board is delegated the legislative function of promulgating cost 
accounting standards "which shall have the full force and effect of 
law . . ." 

Except for the extensive amount of time and technical complexities 
involved, Congress might very well have decided to legislate cost 
accounting standards directly. Were Congress to legislate accounting 
standards, they would be discussed and marked-up in open committee 
meetings, and passed in open session. The CASB meets privately, as 
does the FASB, to decide on accounting standards affecting the public. 
The new "sunshine" legislation (Public Law 94-409), which provides 
for open meetings of many multi-member Government agencies, does 
not affect the closed door policy of either the CASB or the FASB. 

The CASB's 1976 Progress Keport to the Congress states that the 
board has a staff of 37 full-time Government employees — 24 profes- 
sional and 13 administrative and clerical — and a fiscal 1976 budget of 
$1,457,000. The executive secretary of the CASB has told the subcom- 
mittee staff that the board is adequately staffed and funded, and that 
additional personnel and funds would not significantly aid the board 
in performing its functions. In contrast, the FASB staff is approxi- 
mately twice as large as that of the CASB. The FASB's budget in 
1975 was $3,415,437, or more than double the budget of the CASB. 

Relationship With the FASB and Its Sponsors 

The CASB maintains a close relationship with the FASB, the 
AICPA, and other FASB sponsors. During the past year, the CASB 
and its staff met several times with representatives of the FASB and 
its sponsoring groups. According to its report to Congress, the CASB 
meets with those groups to coordinate cost accounting standards with 
financial accounting standards established in the private sector. A list 
of the private groups and their representatives who meet with the 
CASB is included in Appendix J, p. 1566. 

Members of the CASB and its professional staff belong to the 
AICPA and other private groups which sponsor the FASB. The twe 



186 

CASB members from the accounting profession belong to the AICPA, 
and both are from "Big Eight" accounting firms. The CASB mem- 
ber from industry belongs to the Financial Executives Institute. 
Thirteen of the 24 professional staff members belong to the AICPA, 
and several are members of other private interest groups sponsoring 
the FASB. Biographies of CASB members and professional staff 
showing their affiliations with private organizations are included in 
its 1976 Progress Report to the Congress. 

The CASB presented its Public Service Award to the AICPA in 
1976 because of the work done by the AICPA 's Cost Accounting 
Standards Board Committee. (See Appendix J, p. 1580.) As de- 
scribed previously, that committee is dominated by "Big Eight" ac- 
counting firms, and attempts to influence the CASB with their views. 
It is questionable whether the CASB needs to present public service 
awards in order to perform its responsibilities adequately. Such awards 
are certainly not needed to stimulate the efforts of a well-financed pri- 
vate organization which has a vested interest in influencing standards 
set by the CASB. 

Standards 

The board has a capable staff which provides in-depth research and 
analysis on subjects considered by the CASB. As of August 1976, it had 
established 14 cost accounting standards. They cover a variety of sub- 
jects, and most are responsive to the Federal Government's need for 
uniform and meaningful cost accounting standards. A description of 
the standards established by the CASB is included in its annual Prog- 
ress Report to the Congress. 

In two cases, the board showed a disturbing tendency to benefit pri- 
vate contractors with standards that depart from accepted concepts 
of "cost." The first was a proposal to compensate contractors for the 
purported effects of inflation. The Library of Congress projected that 
adoption of the proposal would result in increased charges to the Fed- 
eral Government of $3-$6 million in fiscal 1976, increasing to an esti- 
mated additional $91-$130 million in fiscal year 1985. The defects in 
the CASB proposal were noted by the chairman of this subcommittee 
in his letter of comment on the proposal. (See Appendix J, p. 1581.) 
The proposal was ultimately withdrawn. 

Secondly, the CASB adopted a standard (Cost Accounting Stand- 
ard 414, "Cost of Money as an Element of the Cost of Facilities Capi- 
tal") which permits contractors to charge the Federal Government 
as a "cost" for the return on capital used to build certain plant and 
facilities. Formerly, such "costs" were included in the determination 
of contract profits. This standard departs from the concept of "costs" 
used in reporting profits to the public. Thus, contractors are able to 
charge the Federal Government for a "cost" which is not used for de- 
termining income reported to investors, creditors, and other interested 
parties. 

Another disturbing factor has been the CASB's recent consideration 
of increased exemptions from the requirements of following cost 
accounting standards established by the board. The board has broad 
authority to exempt government contractors from coverage of its 
rules, and is considering using a percentage of sales formula or 
similar method to liberalize its exemption policies. Adoption of such 
a proposal would impair the application of uniform cost accounting 



187 

standards to major contractors — the reason for which Congress 
created the CASB. Use of percentage of sales exemption standards 
by the Renegotiation Board has enabled many of the largest govern- 
ment contractors to escape provisions intended to protect taxpayers. 
The fact that the CASB is successfully setting accounting standards 
with approximately half of the resources used by the FASB suggests 
that Federal agencies are capable of performing that task more effi- 
ciently than private organizations. 



67-159 O - 77 - 14 



CHAPTEK XI. EXAMPLES OF THE XEED FOR ACCOUNT- 
ING AND AUDITING REFORMS 

This study refers to the failure of certain Federal agencies and pri- 
vate organizations to establish uniform and meaningful accounting 
standards. Failures in the process of auditing major corporations have 
also been noted. The scope of those failures is evident from the many 
specific examples which have been brought to public attention. 

Professor Abraham Briloff described the serious accounting and 
auditing problems which have occurred during recent years in his 
statement and appendices presented before the Subcommittee on Over- 
sight and Investigation of the House Committee on Interstate and 
Foreign Commerce on 21 May, 1976. (See Appendix K, p. 1609.) Ap- 
pendix K includes other relevant materials. 

Three accounting series releases issued by the SEC as notice of dis- 
ciplinary settlements against Arthur Andersen & Co., Peat, Marwick, 
Mitchell & Co., and Touche Ross & Co. provide detailed descriptions 
of improper auditing by those firms. (See pages 56, 62, and 64.) Fur- 
ther insights are provided by relevant excerpts from the report of the 
trustee in bankruptcv for the Equitv Funding Corp. (See Appendix 
C, p. 704.) 

An article in the 23 February, 1976 issue of Time magazine summar- 
ized examples of bribes, kickbacks, and political payoffs by major cor- 
porations. (See Appendix K, p. 1754.) 

Detailed information on disclosure of questionable activities by cor- 
porations is contained in the following three documents which may 
be obtained from their respective sources : 

Securities and Exchange Commission, Report of the SEC on Ques- 
tionable <£• Illegal Corporate Payments and Practices* submitted "to 
the Senate Banking, Housing and Urban Affairs Committee. March 
12, 1976. 

House of Representatives, Subcommittee on Oversight and Investi- 
gations, Committee on Interstate and Foreign Commerce, Regulatory 
Reform — Securities and Exchange Commission, May 20, 21, 14, and 
June 1, 1976. 94th Congress, 2d Session (subcommittee print). 

House of Representatives, staff study by the Subcommittee on Over- 
sight and Investigations of the Committee on Interstate and Foreign 
Commerce, SEC Voluntary Compliance Program on Corporate Dis- 
closure, 94th Congress, 2d Session (subcommittee print, June 1976). 

"Creative Accounting" 

The term "creative accounting" is widely used to describe accepted 
accounting techniques which permit corporations to report financial 
results that may not accurately portray the substance of their business 
activities. Substantial financial losses and legal controversies have 
resulted from investments and loans predicated upon reported corpo- 
rate "earnings" which were more apparent than real. Although 
"creative accounting" is recognized as a synonym for deceptive ac- 

(188) 



189 

counting practices, Congress and the public are generally not familiar 
with specific accounting methods which fall within that category. 

"Creative accounting" methods are noteworthy because they remain 
in use as generally accepted accounting principles, even though they 
have been shown to be deceptive in many cases. Their continued use 
and availability illustrate the failures of the existing system for estab- 
lishing accounting standards, and contribute to public cynicism re- 
garding the purpose and usefulness of financial statements. 

In his statement before the House Subcommittee on Oversight and 
Investigation, cited above, Professor Briloff described a variety of 
"creative accounting" methods for reporting business transactions re- 
lating to leases, sales of products and services, capitalized interest, 
pensions, research and development costs, inventoried depreciation, 
business combinations, and exploration costs for natural resources. The 
following materials also describe examples of "creative accounting" : 

Percentage of completion. — The percentage of completion method 
for recognizing income enables companies to report income which 
has not actually been received. Professor Briloff described problems 
resulting from the use of this method of income recognition by Stir- 
ling Homex Corp. and Four Seasons Nursing Homes. Adm. H. G. 
Rickover, who heads the Naval Nuclear Propulsion Program (a joint 
project of the Navy Department and the Energy Research and Devel- 
opment Administration), has testified before Congress on the manner 
in which percentage of completion accounting distorts Navy ship- 
building contracts. (See Appendix K, p. 1721.) 

Research and development. — In a letter to this subcommittee, Pro- 
fessor Briloff explained how Lockheed Aircraft Corp. has reported 
research and development costs as an asset which has permitted the 
company to remain financially solvent. (See Appendix K, p. 1605.) 

Inventories and reserves. — Congressman William J. Hughes of New 
Jersey this year released a study showing how 14 of the Nation's 20 
largest oil companies used accounting adjustments primarily relating 
to inventories and reserves in order to control their profits in 1974. (See 
Appendix K, p. 1755.) 

Accounting for inflation. — The AICPA and certain "Big Eight" ac- 
counting firms have been promoting the concept of adjusting financial 
statements to reflect the purported results of inflation. On March 23, 
1976, the SEC issued Accounting Series Release 190 ordering that 
large corporations estimate and report the purported effects of in- 
flation on some financial accounts. The chairman of this subcom- 
mittee noted the defects in the SEC's rule in a letter opposing its adop- 
tion. (See Appendix I, p. 1440.) Professor Briloff described the gen- 
eral nature of inflation accounting in a letter to Congressman Charles 
Vanik of Ohio. (See Appendix K, p. 1697.) 

Two proposals for reform of the accounting profession and its 
standards from within the profession are included in this study. 

The first proposal, by Professor Briloff, was presented before the 
House Subcommittee on Oversight and Investigation. (See Appen- 
dix K, p. 1654.) 

The second approach has been suggested by Eli Mason, managing 
partner of Mason & Company, a CPA firm headquartered in New 
York City. Mr. Mason is a past vice president of the AICPA, past 
president of the New York State Society of CPAs, and a current 
member of the New York State Board for Public Accountancy. (See 
Appendix K, p. 1747.) 



APPENDIX A— QUESTIONNAIRE TO "BIG 
EIGHT" ACCOUNTING FIRMS AND RE- 
SPONSES 



UMHAH IBBMOFF. CONN.. CHAIRMAN mum*** m*> 

... LEI METCALF, MO«T» CHAIRMAN 

JOHN L. MC CI Fl I AN, AKK. CHAKLES H. FXNCT. ILL. ^^ 

HENIIT M. JACKSON. WASH. JACOB K. JAVIT». N.Y. JOHN 1_ MC CLEJ-LAH, Mt BILL BBOCX. TON. 

EDMUND .. MUSKIE. MAINE WILLIAM V. NOTH, JfL. DC*. EDMUND •. MUSKIE. MAIN! CHARLES H. FENCY. IL 

LEE METCALF. MONT. BILL BROCK. TEN*. BAM NUNN. OA. LOWELL F. WE1CKER. 

JAMES B. ALLEN, ALA. LOWELL P. WEIOCER. J«- CONN. JOHN OLENN, OHIO 

LAWTON CHILES, FLA. V1C reinEMER, STAFF DIRECTOR 

BAM NUNN, OA. t W1NSLOW TURNER. CHIEF COUNSEL 

JOHN GLENN, OHIO ,,, RUSSELL BUILEMHO 

CHIEF C^^ST^RECrO. ^ttlUeb £>lCtU& ^bCXlClU (202) 224-1474 

COMMITTEE ON 

GOVERNMENT OPERATIONS 

SUBCOMMITTEE ON REPORTS, 

ACCOUNTING. AND MANAGEMENT 

(PURSUANT TO SEC 7, S. BXB. MJ. MTM CON6»XS» 

WASHINGTON. D.C- 20910 

(Staff rote: The same letter was 
sent to other '"Big Eight" firms.) 

19 December 1975 



Mr. Walter Hanson 

Managing Partner 

Peat, Marwick, Mitchell S. Company 

345 Park Avenue 

New York, New York 10022 

Dear Mr. Hanson: 

Much attention has recently been focused on the ac- 
counting profession ami its procedures. Revelations of 
corporate wrongdoing have raised serious questions as to the 
quality and independence of outside auditors. Financial 
decisions and public policies are dependent upon the findings 
and procedures of accountants who determine the propriety 
of financial data and other information whicli are required . 
by law to be disclosed. 

This subcommittee is charged with ensuring that ac- 
counting practices used or approved by agencies of the 
Federal government are fair, accurate, and useful to those 
persons who must rely upon them. In particular, this sub- 
committee is concerned with the roles played by the General 
Accounting Office, the Securities and Exchango Commission, 
and the Cost Accounting Standards Board in promoting reliable 
accounting practices. 

(101) 



192 



To a large degree, agencies of the Federal government 
have relied upon the findings and practices of the accounting 
industry in performing the duties assigned to then by Congress. 
The SEC has formalized this dependence in Accounting Series 
Release No. 150 which states that the Commission will general- 
ly respect and endorse the rulings of the Financial Accounting 
Standards Board - a body established and largely funded by 
the accounting profession to set accounting standards for 
the profession. 

Unfortunately, very little information is available 
to the public on accounting firms. In evaluating Federal 
accounting practices, it would bo helpful to the subcommittee 
to have some basic information regarding the activities 
of accounting firms. A questionnaire seeking such informa- 
tion is enclosed. 

As your firm is one of the largest and most influential 
accounting firms, I ask your cooperation in completing 
the questionnaire and returning it to the subcommittee as 
soon as possible. 

Very truly yours, 



Lee-Metcalf 
Enclosure 



193 



Reports, Accounting and Management Subcommittee 

QU ESTIONNAIRE 

1. Please state the number of offices which your firm 
maintains within the United States (If more than one part- 
nership, corporation or other entity exists in the United 
States, please furnish all names and answer subsequent 
questions accordingly.) 

2. Please indicate the number of states, territories or 
possessions of the United States in which your firm main- 
tains an office or affiliated office. 

3. Please state the number of cities outside the United 
States in which your firm maintains offices or has an 
affiliation. 

4. Please state the number of partners in your firm located 

in the United States (include only certified public accountants.) 

5. Please state the number of principals located in your 
offices in the United States who are not certified public 
accountants. 

6. Please state the total number of employees of your firm 
within the United States, excluding only partners and princi- 
pals. 

7. Please indicate the approximate percentage of total 
revenues for services performed by your firm in the following 
categories : 

A. Auditing and accounting 

B. Tax services 

C. Management advisory services including executive, 
recruitment, product analysis, marketing analysis, 
and plant layout. 

D. Actuarial services 

E. Services performed for Federal, State or local 
governments 

F. Other 

8. Please state if your firm renders management or other 
advisory services in the following categories: 

A. Executive recruitment 

B. Marketing analysis 

C. Plant layout 

D. Product analysis 

E. Actuarial services 

F. Federal advisory committees 



194 



9. Please state the name and address of corporations listed 
on the New York Stock Exchange for which your firm is the 
independent auditor. 

10. Please state the name and address of corporations listed 
on the American Stock Exchange for which your firm is the 
independent auditor. 

11. Please state the number of. other publicly-held corpora- 
tions for which your firm is the independent auditor, and 
the number of privately held corporations for which your 
firm is the independent auditor. 

12. Please indicate the total number of partners, principals 
and employees of your firm who are members of the American 
Institute of Certified Public Accountants. 

13. Please state if your firm has made financial contributions, 
directly or indirectly, to the Financial Accounting Standards 
Board. If so, please indicate the amount of contributions 

made annually to date. 

14. Please identify the departments, agencies or subdivisions 
of any federal, state, municipal or other government authority 
for which your firm performed any services during 1975. 

15. Please identify the federal departments, agencies, sub- 
divisions or authorities for which your firm has performed 
services during each year from Jan. 1, 1970 through Dec. 

31, 1974. 

16. Please state your firm's annual gross revenue from 
services performed for Federal departments, agencies, sub- 
divisions or authorities during each year from Jan. 1, 
1970 to Dec. 31, 1975. 

17. Please state if your firm maintains a department, division 
or office for the procurement of Federal , State and local 
government contracts. If so, please indicate the name of 

the person(s) in charge of said department, division or 
office, and address of such office (s). 



195 



Mr. Walter Hanson 

Peat, Marwick, Mitchell & Co 

345 Park Avenue 

New York, N.Y. 10022 

Mr. William Kanaga 
Arthur Young & Company 
277 Park Avenue 
New York, N.Y. 10017 

Mr. Michael Chetkovich 
Haskins & Sells 
1114 Avenue of the Americas 
New York, N.Y. 10036 

Mr. Richard T. Baker 

Ernst & Ernst 

1300 Union Commerce Building 

Cleveland, Ohio 44101 

Mr. John C. Biegler 
Price Waterhouse & Co. 
1251 Avenue of the Americas 
New York, N.Y. 10020 

Mr. Philip L. Defliese 
Coopers & Lybrand 
1251 Avenue of the Americas 
New York, N.Y. 10020 

Mr. Harvey Kapnick 
Arthur Andersen & Co. 
69 West Washington Street 
Chicago, Illinois 60607 

Mr. Russell E. Palmer 
Touche Ross & Co. 
1633 Broadway 
New York, N.Y. 10019 



196 



Arthur Andersen & Co. 



69 West Washington Street 
Harvey Kapnick CHICAGO. ILLINOIS 60602 

CHAIRMAN 

(312) 346-6262 

January 7, 1976 



Honorable Lee Metcalf, Chairman 
Subcommittee on Reports, Accounting, 

and Management 
Committee on Government Operations 
United States Senate 
Washington, D. C. 20510 

Dear Senator Metcalf: 

On December 29, we received your letter of December 19, 
1975, and the questionnaire requesting certain information on 
our firm. We are in the process of assembling this information 
for submission to your Subcommittee. 

In your letter, you noted that "very little information 
is available to the public on accounting firms" and that serious 
questions have recently been raised as to "the quality and inde- 
pendence of outside auditors." In an effort to meet our public 
interest responsibility and so that interested parties would 
have information with regard to our firm and the control we have 
over our professional practice, we have prepared annual reports 
for each of our past three fiscal years for distribution to our 
personnel, clients and others. Copies of these reports are 
enclosed together with copies of charts (prepared for our in- 
ternal purposes ) showing information on the independent auditors 
for companies listed on the New York and American Stock Exchanges 
These may be of some immediate assistance to your Subcommittee. 

In 1974, our firm established an independent Public 
Review Board to review our operations on a complete and contin- 
uing basis. The Public Review Board's first report to our firm 
is included, in its entirety, beginning on page 32 of the en- 
closed annual report for our fiscal year ended August 31* 1975. 
In addition, this same annual report contains a section pertain- 
ing to our programs and policies for the quality control of our 
professional practice (beginning on page 23) which may be help- 
ful to your Subcommittee. 

If we can be of further assistance to you, please do 
not hesitate to contact me, Mr. Charles A. Bowsher, a partner 



197 



Arthur Andersen & Co. 



Honorable Lee Metcalf 
January 7, 1976 
Page 2 



in our Washington, D. C. office who is the Director of our 
Federal Government Liaison group, or Mr. G. E. Stanton, our 
Vice Chairman-Administration, who will be sending you the 
requested information on our firm. 




Enclosures 



Copy and enclosures to: 

Senator John L. McClellan 
Senator Edmund S. Muskie 
Senator Sam Nunn 
Senator John Glenn 



Senator Bill Brock 
Senator Charles H. Percy 
Senator Lowell P. Weicker, Jr 



Mr. Vic Reinemer, Staff Director 
Mr. E. Winslow Turner, Chief Counsel 



198 




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200 



Excerpt from Arthur Andersen § Co . ' s Aug. 
31, 1975 "Annual Report to our Worldwide 
Organization. " 



Left. Barrett Crawford, Director- 
Finance, with G E Stanton, Vice 
Chairman — Administration 



TOTAL PERSONNEL ,n Thousands 
at August 31 




FEES m Millions of Dollars 

















12 



Worldwide 

Financial 

Review 

Combined Financial Statements 
In our 1973 and 1974 Annual Reports we in- 
cluded summaries of combined financial informa- 
tion on the Arthur Andersen Worldwide Organi- 
zation. This year we have included conventional 
financial statements and accompanying notes 
prepared in accordance with generally accepted 
accounting principles. Summary financial data 
which illustrate some of the effects of inflation 
are shown on page 21. 

The accompanying combined financial 
statements have not been audited by another 
firm of independent public accountants. How- 
ever, in addition to periodic internal audit 
procedures under the supervision of the Direc- 
tor — Finance, these financial statements were 
subjected to an external-type audit by a team of 
audit partners, managers and staffmembers who 
were not associated with the operations subject to 
their examination. The scope of the external- 
type audit was reviewed with the Audit Commit- 
tee of the Public Review Board and was compa- 
rable in all respects to the scope of audit we fol- 
low in auditing client financial statements. 
Because it lacks independence, the audit team 
which conducted the external-type audit is not in 
a position to express an opinion on the combined 
financial statements. 

The firm changed its fiscal year from 
March 31 to August 31 in 1974. Accordingly, all 
accompanying financial data are presented on an 
August 31 basis. 



Operating Results 

Considering the business recession and adverse 
economic climate in many countries during the 
past year, the worldwide operating results in 
fiscal 1975 were very good. 

Year Ended August 31 p ercenX 

1975 1974 Increase 

Fees 1<x professional services .... $386,341,000 $332,786,000 16.1% 

Expenses — 

Employee compensation 208.283.000 178.924.000 16.4 

Other 87,240,000 74.266.000 17.5 

Earnings for the year 90,818.000 79,596.000 14.1 

Average earnings per partner 
active at year-end 95,152 90,550 5.1 



The percentage of worldwide fees con- 
tributed by operations outside the United States 
continued its upward trend. During fiscal 1975 it 
was 24.8%; this compares with 22.7% in 1974, 
20.5% in 1973 and 18.3% in 1972. 

Approximately 30% of the $53.6 million 
increase in worldwide fees in fiscal 1975 was due 
to a 4.5% growth in hours of client service (2.8% 
in the United States and 9.0% in all other coun- 
tries). The remainder of this increase was due to 
higher average hourly billing rates (approxi- 
mately 8.5% in the United States and 14.7% in all 
other countries). Billing rate increases were 
necessary to cover increased employee compen- 
sation levels and other expenses. Due to infla- 
tion, employee compensation in some countries 



201 



ACCOUNTING 
AND 
AUDIT 
PRACTICE 




William Ingersoll. Firm Treasurer, with George Bunge, 
Director — Firm Taxes, and Betty Brans, receptionist 



ADMINISTRATIVE 

SERVICES 

PRACTICE 



SOURCE OF 1975 
WORLDWIDE FEES 




EMPLOYEE 
COMPENSATION 



PARTNERS' 
COMPENSATION. 
RESIGNATION. 
RETIREMENT AND 
DEATH PAYMENTS. 
AND RETURN ON 
CAPITAL AT RISK 



OTHER 
EXPENSES 

DISPOSITION OF 1975 

WORLDWIDE FEES 

was adjusted more frequently than once a year. 
In several countries, such adjustments were 
required to be based upon changes in a govern- 
ment price index. 

During 1975, we incurred costs ag- 
gregating $29,571,000 (including $655,000 of in- 
terest expense and $10,855,000 of other nonpay- 
roll expenses) in direct training of our profes- 
sional personnel. This amounts to approximately 
8% of fees. Research and quality control costs in- 
curred in 1975 were $11,520,000 (including 
$4,626,000 of nonpayroll expenses), or 3% of fees. 

The participants in worldwide earnings 
in fiscal 1975 included 844 partners, participating 
principals, non-United States principals and over- 
seas representatives active as of August 31, 1975, 
and 132 resigned and retired partners and estates 
of deceased partners. As indicated in the Com- 
bined Statement of Earnings, the compensation 
of partners for their services is not shown as an 
operating expense. Therefore, earnings for the 
year are not profit to the partners. Rather, they 
represent the amount available to cover partners' 
current compensation, resignation, retirement 
and death payments and return on capital at risk. 
Furthermore, each partner must personally pay 




Left Philip Keirn, 
Director — Systems and 
Computer Operations — US , 
with Frank Monhart, 
Firm Controller 



for retirement and fringe benefits. After provid- 
ing for such items, partner earnings must be at a 
level to attract and retain partners with the 
professional competence essential to the firm. 



Financial Position 

As shown below, with over $100 million of part- 
ners' capital and with long-term debt represent- 
ing only 20% of total capitalization as of August 
31, 1975, the firm's capital structure continues to 
be sound: 

August 31 
1975 1974 Increase 

Working capital $88,864,000 $87,534,000 $1,330,000 

Net property and equipment 36.722.000 32.063.000 4.659.000 

$125,586,000 $119,597,000 $5,989,000 

Less— Long-term deDt 24.973.000 26.475.000 (1.502.000) 

Partners' capital $100,613,000 $93,122,000 $7,491,000 



13 



Net additions to property and equip- 
ment were $10,049,000 in 1975 and $8,483,000 
in 1974. Offices which made major moves or ad- 
ditions to their office space during fiscal 1975 
included Chicago, Hartford, Houston, London 
and Paris. 

The average paid-in and pro forma capi- 
tal per partner active as of August 31, 1975, 
was $96,000. 



202 



14 



Arthur Andersen Worldwide Organization 
Combined Statement of financial Position (Note 1) 
August 31, 1975 and 1974 (not audited by independent accountants) 

1975 1974 

ASSETS 

(in thousands) 

Current Assets: 

Cash $ 20,631 $ 18,377 

Receivables from clients, less allowances of $4,930 in 1 975 

and $4,154 in 1974 for uncollectible accounts 52,157 51,104 

Unbilled services at estimated billable amounts 45,605 45,765 

Other current assets 6,022 4,975 

Total current assets $124,415 $120,221 

Property and Equipment, at cost (Notes 1 and 7): 
Center for Professional Development — 

Land, buildings and equipment $ 11,373 $ 11,062 

Less — Accumulated depreciation 2,180 1,416 

$ 9,193 $ 9,646 
Offices — 

Land and buildings $ 4,313 $ 4,304 

Leasehold improvements 15,889 12,821 

Furniture and equipment 24,376 21,056 

$ 44,578 $ 38,181 

Less — Accumulated depreciation and amortization 17,049 15,764 

$ 27,529 $ 22,417 

Net property and equipment $ 36,722 $ 32,063 

$161,137 $152,284 

LIABILITIES AND PARTNERS' CAPITAL 

Current Liabilities: 

Notes payable to banks (Note 2) $ 1.269 $ 756 

Current portion of long-term debt 1,538 1,463 

Accounts payable 5,403 6,618 

Accrued payroll, withholdings and fringe benefits 20,699 18,738 

Accrued taxes (Note 1) 3,258 2,559 

Other accrued liabilities (Note 8) 3,384 2,553 

Total current liabilities $ 35,551 $ 32,687 

Long-term Debt (Note 2) $ 24,973 $ 26,475 

Partners' Capital (Notes 1, 3 and 8): 

Paid-in capital $ 42,197 $ 42,965 

Pro forma capital 54,535 54,145 

Undistributed cash earnings 3,881 (3,988 ) 

Total partners' capital $100,613 $ 93,122 

$161,137 $152,284 



The accompanying notes are an integral part ot this statement. 



203 



Arthur Andersen Worldwide Organization 

Combined Statement of Earnings (Note 1) 
for the Years Ended August 31, 1975 and 1974 (not audited by independent accountants) 

1975 1974 
(in thousands) 

Fees for Professional Services $386,341 $332,786 

Expenses (not including partner compensation): 
Employee compensation and fringe benefits — 

Managers $ 58,367 $ 48,854 

Professional staff 121,506 105,839 

Office support group 28,410 24,231 

$208,283 $178,924 

Other expenses — 

Occupancy (including depreciation and amortization) $ 22,300 $ 18,964 

Training (including depreciation on Center for Professional Development) 10,855 8,909 

Research and quality control 4,626 3,322 

Personnel transfers and expatriate allowances 5,926 4,883 

Professional indemnity insurance and litigation 4,992 4,600 

Practice development 4,042 3,321 

Provision for uncollectible accounts 3,925 3,102 

Professional and office supplies 3,861 3,213 

Contributions to nonprofit organizations and civic activities 2,671 2,472 

Telephone, telex and postage, net 2,126 2,127 

Recruiting professional personnel 1,510 1,698 

Professional society activities and dues 1,525 1,445 

Management and annual partners' meetings 1, 106 1,830 

Foreign currency translation and exchange losses, net (Note 1) 1,089 366 

Interest, net 1,708 1,723 

Entity income and business taxes (Note 1) 3,568 1,749 

Other 11,410 10,542 

$ 87,240 $ 74,266 15 

Total expenses $295,523 $253,190 

Earnings for the Year (Note 1) $ 90,818 $ 79,596 

Allocation of Earnings (Notes 3 and 5): 

To active partners — 

Resigned, retired and deceased partners to date of resignation, retirement or death $ 4,785 $ 2,255 

Partners active at year-end 80,308 73,708 

To resigned and retired partners and estates of deceased partners — 

Retirement and supplementary payments 4,726 3,178 

Not allocated to partners — retained for specific partnership purposes 999 455 

$ 90,818 $ 79,596 

Number of partners active at year-end (weighted in 1974 for change of fiscal year) 844 814 

Average earnings per partner active at year-end $ 95,152 $ 90,550 



The accompanying notes are an integral part of this statement. 



67-159 O - 77 - 15 



204 



Arthur Andersen Worldwide Organization 

Combined Statement of Source and Disposition of Working Capital (Note 1) 
for the Years Ended August 31 , 1975 and 1974 (not audited by independent accountants) 

1975 1974 

(in thousands) 
Source of Working Capital: 

Earnings for the year $90,818 $79,596 

Depreciation and amortization — not requiring an outlay of working capital 5,390 4,639 

$96,208 $84,235 

Capital paid in by partners (Note 3) 2,326 4,941 

Additional long-term debt — 2,000 

Net proceeds from sale of office building — 196 

Total $98,534 $91,372 

Deposition of Working Capital: 

Distribution of cash earnings $82,559 $78,049 

Repayment of paid-in capital to resigned and retired 

partners and estates of deceased partners 3,094 893 

Net additions to property and equipment — 

Center for Professional Development 31 1 2,344 

Offices 9,738 6,139 

Reduction of long-term debt 1,502 1,817 

Total $97,204 $89,242 

Increase In Working Capital (Note 6) $ 1,330 $ 2,130 

Working Capital— Beginning of Year 87,534 85,404 

Working Capital— End of Year $88,864 $87,534 

Combined Statement of Changes in Partners' Capital (Note 1) 
for the Years Ended August 31, 1975 and 1974 (not audited by independent accountants) 

1975 1974 

1 6 (in thousands) 
Paid-in Capital (Note 3): 

Balance, beginning of year $42,965 $38,917 

Capital paid in by partners 2,326 4,941 

Repayment of paid-in capital to resigned and retired 

partners and estates of deceased partners (3,094) _ (893 ) 

Balance, end of year $42,197 $42,965 

Pro Forma Capital (Note 3): 

Balance, beginning of year $54,145 $45,904 

Cash earnings for the year $90,428 $71,355 

Memorandum adjustments to reflect accrual basis of accounting, net (Note 1) 390 ' 8,241 

Earnings for the year $90,818 $79,596 

Cash earnings for the year transferred to undistributed cash earnings (90,428 ) (71,355 ) 

Balance, end of year $54,535 $54,145 

Undistributed Cash Earnings (Note 3): 

Balance, beginning of year $ (3,988) $ 2.706 

Cash earnings for the year 90,428 71,355 

Distribution of cash earnings (82,559 ) (78,049 ) 

Balance, end of year $ 3,881 $ (3.988 ) 

The accompanying notes are an integral part of these statements. 



205 



Arthur Andersen Worldwide Organization 

Notes to Combined Financial Statements 
August 31, 1975 and 1974 (not audited by independent accountants) 

Maintenance and repairs are charged to expense as incurred 
and major replacements and improvements are capitalized. 
The cost and accumulated depreciation of items sold, retired, 
or fully depreciated are removed from the property accounts 
and any resultant gain or loss is recorded currently in earnings. 

Income Taxes — 

Since partnerships in most countries are not taxable as en- 
tities, substantially all taxes on earnings are paid by the 
partners on the basis of their individual income tax returns. 
The accompanying combined statement of earnings includes 
provisions of $2,800,000 in 1975 and $1,300,000 in 1974 for 
income taxes of certain non-U.S. entities which are taxed as 
entities. Earnings of certain such non-U.S. entities are required 
to be reported on a basis different for tax purposes than for 
accounting purposes. Deferred non-U.S. entity income taxes 
(not material in amount) have been provided to reflect the tax 
effect of such timing differences. 

Earnings for the Year — 

Earnings for the year are not comparable to the net income 
of a corporation and are not profit to the partners. Rather, they 
represent the amount available to cover partners' current 
compensation, resignation, retirement and death payments 
and return on capital at risk. Each partner must personally pay 
for retirement and fringe benefits. 

Change of Fiscal Year — 

The firm changed its fiscal yea'r from March 31 to August 31 
in 1974. Accordingly, all accompanying financial data are pre- 
sented on an August 31 basis. Certain reclassifications have 
been made in 1974 to conform previously reported data to the 
1975 format. 

(2) Financing Arrangements: 

Long-term debt as of August 31, 1975 and 1974, consisted 
of the following (in thousands): 



( 1 ) Summary of Significant Accounting Policies: 
Basis for Presentation of Financial Statements — 

The accompanying financial statements include the com- 
bined accounts of the worldwide organization of Arthur 
Andersen (the firm) which includes Arthur Andersen & Co. (an 
Illinois partnership), separate legal entities with the Arthur 
Andersen name and organizations with which Arthur Ander- 
sen & Co. has exclusive representation agreements, all of 
which are authorized under the laws of the countries in which 
such operations are located. Within this worldwide organiza- 
tion there are partners, participating principals, non-United 
States principals, and overseas representatives (collectively 
referred to herein as "partners"). 

Except as required by the laws of certain countries, the 
Illinois partnership and related worldwide organization entities 
maintain books and records and file income tax returns on the 
cash basis of accounting. Distributions to partners are deter- 
mined on the cash basis of accounting. The accompanying 
combined financial statements have been prepared in accord- 
ance with generally accepted accounting principles on the ac- 
crual basis of accounting by combining cash basis accounting 
records with memorandum adjustments to include receivables 
for billed and unbilled services, accounts payable, accrued 
liabilities, etc. 

Translation of Foreign Currencies — 

Assets and liabilities of all non-U.S. entities, except for 
property and related depreciation accounts, have been trans- 
lated into U.S. dollars at rates of exchange in effect at year- 
end. Property and depreciation accounts have been translated 
at rates of exchange in effect at acquisition dates. Fees and 
expenses, other than depreciation, are translated at average 
exchange rates in effect during the year. Gains and losses (a 
net loss of $1,090,000 in 1975 and $182,000 in 1974) on the 
translation of foreign currencies to U.S. dollars are recorded 
currently in earnings. 

Revenue Recognition — 

Fees for professional services in the accompanying financial 
statements are recognized at the time such services are ren- 
dered, at estimated billable amounts. 

Training, Research and Quality Control — 

All training, research and quality control costs are charged 
to expense as incurred. 

Property and Depreciation — 

Generally, depreciation on property and equipment and 
amortization of leasehold improvements are computed by use 
of the following methods and lives: 

Method Life in Years 

Land improvements Declining balance 10 

Buildings Straight line 1 9 to 37 

Furniture and equipment Double declining 6 to 12 

balance 

Leasehold Straight line Term of lease 
improvements 



1975 



1974 



Notes payable to a nonclient insurance 
company — 

Unsecured note, payable $1,326,000 
semiannually to 1985, including 

interest at 7V*% $18,525 $19,767 

Unsecured note, payable $141,000 
semiannually to 1986, including 

interest at 9V2% 1,905 2,000 

Mortgage note, payable $110,000 
semiannually to 1985 and 
$1,436,000 semiannually in 1986, 
including interest at 7V4% (collater- 
alized by office building in Los 

Angeles) 2,993 2,995 

Purchase mortgage note, payable 
$406,000 annually to 1990, including 
interest at 10% (collateralized by Cen- 
ter for Professional Development) 



Less — Current portion 



3,088 

$26,511 
1,538 



3,176 

$27,938 
1,463 



17 



Long-term debt $24,973 $26,475 



206 



Arthur Andersen Worldwide Organization 

Notes to Combined Financial Statements 
August 31, 1975 and 1974 (not audited by independent accountants) 



18 



The terms of the unsecured long-term note agreements 
provide, among other things, that the firm will not make any 
distributions of earnings to any of its partners or undertake 
certain other restricted transactions unless prior to and im- 
mediately after such distribution or transaction, net current 
assets will not be less than two times funded debt (as defined) 
and net assets will not be less than one and one-quarter times 
funded debt. As of August 31, 1975, both net current assets 
and net assets were in excess of three and one-quarter times 
funded debt. The terms of these agreements also provide that 
the firm may request additional unsecured borrowings of $2 
million in 1976 and 1978, and in 1980 not less than $4 million 
(either in a lump sum or in installments between 1980 and 
1985) at V2% over the prime interest rate. If such requests are 
not granted, the firm may obtain such funds from other lenders 
in 1976 and 1978 and may prepay the entire loan balance 
without penalty and negotiate with other lenders in 1980. 

The maturities of long-term debt through 1980 are as fol- 
lows (in thousands): 

1976 $1,538 

1977 1,656 

1978 1,784 

1979 1,921 

1980 2,070 

A $15 million line of credit at the prime interest rate has 
been arranged with a nonclient bank to cover temporary un- 
foreseen conditions and to allow time to effect a proper rear- 
rangement of the firm's capital structure. This line requires the 
firm to maintain an average deposit balance of 10% of the line 
or 20% of the outstanding loan, whichever is greater. No 
amounts were borrowed under this line of credit during 1975 
or 1974. 

The firm also has lines of credit of approximately $4 million 
(principally overdraft arrangements) with several nonclient 
banks for use in countries outside the United States, primarily 
to cover local peak working capital requirements and to hedge 
against currency exchange rate fluctuations. Borrowings 
under these lines of credit averaged $1,352,000 in 1975 and 
$921,000 in 1974 at average interest rates of 12.3% and 
12.7%. Maximum borrowings under these lines were 
$1,878,000 in 1975 and $1,251,000 in 1974. 



(3) Partners' Capital: 

No partner has in excess of V2 of 1% of partners' capital or 
participation in earnings for the year. 

Partners' capital as of August 31, 1975 and 1974, consisted 
of the following (in thousands): 



1975 



1974 



Paid-in Capital— 
Paid-in capital $42, 197 $42,965 



Partners were admitted to the firm on April 1, 1974, prior to 
the change of fiscal year, and again on September 1, 1975. 

Paid-in capital as of August 31, 1975, includes $2,326,000 
paid in by new partners admitted to the firm on September 1 , 
1 975, and by existing partners for additional units of participa- 
tion effective September 1, 1975. Additional paid-in capital of 
$2,708,000, receivable from partners as of September 1, 
1 975. was not recorded as of August 31. 1 975. Paid-in capital 
is repayable within sixty days following a partner's resignation, 
retirement or death. No amounts are paid in or returned to 
partners for goodwill or appreciation of assets; thus, partners 
do not realize any appreciation on their paid-in capital. 



Pro Forma Capital — 



1975 



Allocated to partners $43,396 

Not allocated to partners — retained 
for specific partnership purposes 
(partner retirement and supplemen- 
tary payments [Note 5) and unin- 
sured risks [Note 8]) 1 1,139 



1974 
$44,005 



10.140 



$54,535 $54,145 

Pro forma capital allocated to partners is equal to their 
share of uncollected receivables from clients and unbilled ser- 
vices, less accounts payable, accrued liabilities, etc, not al- 
located for specific partnership purposes. Pro forma capital is 
payable at various dates after a partner's resignation, retire- 
ment, or death. 



Undistributed Cash Earnings — 

Cash distributions to partners in 
excess of cash earnings for the 
five months ended August 31, 
1974 (date of change in fiscal 
year; repaid in December, 1974) . 

Fiscal 1975 undistributed cash 
earnings paid in October, 1975 ... 



1975 



$ — 



1974 



$(3,988) 



3,881 — 



$3,881 $(3,988) 



(4) Employee Profit-Sharing and Pension Plans: 

The firm has a trusteed profit-sharing plan for substantially 
all employees in the United States and Puerto Rico. The min- 
imum annual contribution to the profit-sharing trust is based 
on the firm's earnings as defined in the plan. The provision for 
profit-sharing was $2,820,000 in 1975 and $2,469,000 in 
1974. The payment to the profit-sharing trust in 1975 was 
$3,263,000 which was 5% of members' compensation, the 
maximum amount contributable under the terms of the plan. 

The firm also has a noncontributory pension plan for em- 
ployees in the United States and Puerto Rico. The provision for 
pension expense was $749,000 in 1975 and $559,000 in 
1974, which includes the amortization of unfunded past- 
service costs over ten years. As of April 1. 1975 (date of latest 
actuarial valuation), the unfunded past-service liability was 
$1,675,000 including $965,000 of actuarially computed vest- 
ed benefits in excess of pension fund assets. 



207 



The United States Employee Retirement Income Security 
Act of 1974 requires the firm to amend the above plans to 
conform with certain provisions of the Act which will become 
effective in 1976. Management believes that the effect of 
these changes on annual profit-sharing and pension costs, the 
funding of such costs for 1976 and subsequent years and un- 
funded vested benefits will not be significant. 

The firm also has profit-sharing, pension or similar govern- 
ment-sponsored plans for employees in other countries. It is 
the firm's policy to fund profit-sharing and pension costs. 



(5) Partner Resignation, Retirement, 
and Death Payments: 

The partners have agreed that all eligible partners will par- 
ticipate in the United States Partners' and Participating Prin- 
cipals' Profit Sharing Plan (Keogh Plan) or equivalent plans 
outside the United States. Annual contributions of individual 
partner earnings are required to be made to a trust under the 
Keogh Plan or to equivalent plans in the amount of 5% of the 
participant's cash earnings or $5,000, whichever is less. Funds 
in such plans are administered by a committee of partners and 
benefits are paid from the trusts. 

In addition, partners participate in the earnings of the firm 
after resignation, retirement, or death. Retirement payments 
are made to retired partners and the estates of deceased 
partners. Such payments were made at the rate of $10,800 
annually in 1975 and $9,975 in 1974, commencing at manda- 
tory retirement age (changed from age 65 to 62 effective July 
1, 1974) in monthly installments for life or for ten years certain 
in case of death. Such payments may begin at an earlier age at 
reduced amounts. The amounts payable are adjusted annually 
based upon a price index. Such payments aggregated 
$868,000 in 1975 and $325,000 in 1974 to retired partners, to 
estates of deceased partners, and to resigned partners who 
resigned after age 50 with 20 years of service. In general, such 
resigned partners receive discounted lump-sum settlements at 
the time of resignation. An actuarial determination of amounts 
payable to partners as of August 31, 1975 (in process of 
amortization over 30 years) was approximately $17,000,000, 
of which approximately $6,500,000 was applicable to 
partners already retired. These retirement payments can be 
rescinded or revoked at any time by a two-thirds vote of the 
partners. 

For partners as of July 1, 1974 (the effective date of adopt- 
ing the mandatory Keogh-type plans), certain supplementary 
amounts are payable upon resignation or retirement and to 
estates of deceased partners based upon years as a partner 
and an age/discount formula to July 1, 1974. No amounts are 
payable to partners admitted after July 1, 1974. Unpaid 
amounts are increased by interest at 5% per annum. As of 
August 31, 1975, the aggregate amount payable was 
$41,790,000, including interest to that date, and is being al- 
located from annual earnings over a ten-year period ending in 
1984 Payments of such amounts were $4,332,000 in 1975 
and $529,000 in 1974, including $1,181,000 in 1975 and 
$331,000 in 1974 to the Keogh-type plans on behalf of certain 
active partners. 

Payments and allocations of earnings for partner retirement 
and supplementary payments aggregated $6,700,000 in 1975 
($4,520,000 to resigned and retired partners and estates of 



deceased partners, $1,181,000 to certain active partners for 
Keogh or equivalent plan contributions, and $999,000 allo- 
cated to pro forma capital for future retirement and sup- 
plementary payments). 

(6) Changes in Working Capital: 

Combined Statement of Financial Position increases (de- 
creases) which increased working capital to $88,864,000 and 
$87,534,000 as of August 31, 1975 and 1974, were as follows 
(in thousands): 

1975 1974 

Current assets — 

Cash $2,254 $(4,829) 

Receivablesfromclients.net 1,053 11,542 

Unbilled services (160) (4,004) 

Other current assets 1,047 (1,016) 

$4,194 $ 1,693 

Current liabilities — 
Notes payable to banks and current 

portion of long-term debt $ 588 $ 627 

Accounts payable (1.215) (30) 

Accrued payroll, withholdings and 

fringe benefits 1,961 232 

Other 1,530 (1,266 ) 

$2,864 $ (437 ) 

Increase in working capital $1,330 $2,130 

(7) Lease Commitments: 

The firm has various lease agreements, principally for office 
space. Rental expense was $16,532,000 in 1975 and 
$13,655,000 in 1974. In most cases, such payments include 
insurance, normal maintenance, etc. As of August 31, 1975, 
commitments under these leases, excluding expense escala- 
tion provisions, aggregated $148,552,000 which is payable as 
follows (in thousands): 

1976 $ 16,015 

1977 15,341 

1978 14,130 

1979 12,994 

1980 12,115 

1981-1985 46,917 

1986-1990 19,546 

1991-1995 9.611 

1996-2020 1,883 

$148,552 

The present value of these payments at 8Y2% is approximately 
$90 million. 

(8) Litigation: 

The firm has been named a defendant in a number of law- 
suits and certain claims are pending. Based upon the opinions 
of legal counsel and other relevant data, estimated liabilities 
for uninsured risks with respect to such lawsuits and claims 
were accrued as of August 31, 1975 and 1974, and are includ- 
ed in other accrued liabilities. 

In order to provide equity among partners for lawsuits which 
may be filed in the future with respect to professional services 
rendered in the past, the partners have allocated a portion of 
pro forma capital to cover uninsured risks. 



19 



208 



(Staff Note: Booklet entitled "Assuring the 
Quality of our Professional Practice" 
retained in committee files.) 



Arthur Andersen & Co. 



G. E. Stanton 

VICE CHAIRMAN- ADMINISTRATION 



69 West Washington Street 
Chicago, Illinois 60602 

January 29, 1976 



Honorable Lee Metcalf, Chairman 
Subcommittee on Reports, 

Accounting, and Management 
Committee on Government Operations 
United States Senate 
Washington, D.C. 20510 

Dear Senator Metcalf: 

Enclosed are two copies of our response to your letter 
and questionnaire of December 19, 1975 (received December 29). 
Our responses to the questions have been numbered to correspond 
with the questionnaire submitted to us. We have previously 
submitted to you, and the members of your Subcommittee, copies 
of our annual report for each of our past three fiscal years. 
Also enclosed are two copies of a booklet we recently prepared 
for distribution to our personnel and our clients entitled 
"Assuring the Quality of Our Professional Practice." 

Please contact Mr. Harvey Kapnick, Chairman and Chief 
Executive of our firm, or Mr. Charles A. Bowsher, a partner in 
our Washington, D.C., office who is the Director of our Federal 
Government Liaison Group, or me, if we can be of further assistance 
in discussing these matters or providing additional information 
on our firm. 

Very truly yours, 



c 




Enclosures 



209 



Page 1 of L, 



ARTHUR ANDERSEN & CO 



RESPONSE TO QUESTIONNAIRE OF UNITED STATES SENATE 
SUBCOMMITTEE ON REPORTS, ACCOUNTING, AND MANAGEMENT 



1. Our firm consists of two operating entities in the United States: 

Arthur Andersen & Co. (an Illinois partnership), which is 
our principal operating entity; and Arthur Andersen & Co. 
(a Louisiana partnership), which covers the operations of 
our New Orleans office. All the data provided herein have 
been combined for both partnership entities. In addition, 
we have an inactive United States entity, Arthur Andersen & Co 
(a Florida partnership). 

We have forty-eight (48) offices in the United States excluding 
the Commonwealth of Puerto Rice. 

2. As of December 31, 1975, our firm had offices in thirty (30) 

states, territories and possessions of the United States 
excluding the Commonwealth of Puerto Rico. 

3. As of December 31> 1975, the Arthur Andersen Worldwide 

Organization had offices in fifty-eight (58) cities located 
in thirty-five (35) countries (including the Commonwealth of 
Puerto Rico) outside the United States. 

4. As of December 31, 1975, we had six hundred and thirty-eight 

(638) U.S. partners who are certified public accountants 

and were located in the United States excluding the 

Commonwealth of Puerto Rico. In addition, we had sixty (60) 

U.S. partners who are certified public accountants and 

were located outside the United States on temporary expatriate 

assignments including five (5) located in the Commonwealth 

of Puerto Rico. 



As of December 31, 1975, we ha 
pating principals located in 
the Commonwealth of Puerto R 
U.S. participating principal 
States on temporary expatria 
located in the Commonwealth 
principals occupy positions 
partners, but do not engage 
practice or our tax practice 
administrative services prac 
administrative positions in 
certified public accountants 
under various state statutes 
firm. ) 



d fifty-six ( 56 
the United Sta 
ico. In additi 
s located outsi 
te assignments 
of Puerto Rico, 
substantially e 
in our accounti 
They functio 
tice or in cert 
our firm. They 
, and, therefor 
, be members of 



) U.S. partici- 
tes excluding 
on we had nine ( 9 ) 
de the United 
including one (l) 

( Participating 
quivalent to 
ng and audit 
n in our 
ain internal 

are not 
e, may not, 

an accounting 



As of December 31, 1975, the total number of our United States 
employees (excluding the Commonwealth of Puerto Rico) was 
8,554- (excluding partners and participating principals). 



210 



Page 2 of 4 



ARTHUR ANDERSEN & CO 



RESPONSE TO QUESTIONNAIRE OF UNITED STATES SENATE 
SUBCOMMITTEE ON REPORTS, ACCOUNTING, AND MANAGEMENT 



For our fiscal year ended August 31, 1975, the percentages 
of our United States revenues (i.e., professional fees) 
for services performed by our firm were: 

A. Accounting and Audit 66% 

B. Tax 1855 

C. Administrative Services (i.e., Management 

Advisory Services) 16% 

10055 



D. No actuarial services are provided by our firm. 

E. The accounting and audit, tax, and administrative 

services revenues relating to United States 
Federal, state or local governments are included 
in the percentages stated in A, B and C above. 
Our revenues from such governmental services 
approximated 3% of our total United States 
revenues in our fiscal year ended August 31, 
1975. 

F. We had no "other" revenues of any significance. 

Providing the above data on a calendar year basis would 
require considerable additional analysis and processing 
of our records. We do not believe that such restatement 
would change the percentages set forth above. 

8. Our firm does not render management or advisory services in 

any of xhe following categories: 

A. Executive recruitment 

B. Marketing analysis - (We do not perform marketing 

studies designed to measure potential or actual 
customer acceptance of products.) 

C. Plant layout 

D. Product analysis 

E. Actuarial services 

F. Federal Advisory Committees - (Individual members of 

our firm have served on several United States Federal 
advisory committees. Payments received for such 
individual activities and remitted to the firm 
have been insignificant in amount.) 

9. Attached as Exhibit 1 is a listing (as of December 31, 1975) 

of the names and headquarters' location of the 274 audit 
clients of our firm with equity securities listed on the 
New York Stock Exchange. (Full addresses for these companies 
and those listed on the American Stock Exchange, Exhibit 2, 
are not available from our computer files, but could be 
obtained from other sources and furnished, if necessary. ) 



211 



ARTHUR ANDERSEN & CO. 



Page 3 of 4 



RESPONSE TO QUESTIONNAIRE OF UNITED STATES SENATE 
SUBCOMMITTEE ON REPORTS, ACCOUNTING, AND MANAGEMENT 

10. Attached as Exhibit 2 is a listing _( a s_ of December 31, 1975) 

of the names and headquarters' location of the 176 audit 
clients of our firm with equity securities listed on the 
American Stock Exchange. 

11. Our firm is the independent auditor for approximately six 

thousand (6,000) other clients in the United States. Our 
central client records do not identify the type of legal 
entity (i.e., corporation, partnership, proprietorship, 
individual, etc.) or whether the client is publicly or 
privately held. We, therefore, cannot answer this question 
without making a detailed analysis of the client records 
in each of our offices in the United States. 

12. As of December 31, 1975, according to our records, 2,352 of 

our partners and employees were members of the American 
Institute of Certified Public Accountants. Participating 
principals in our firm are not certified public accountants 
and, therefore, cannot be members of the American Institute 
of Certified Public Accountants. 

13- Our firm has made financial contributions, directly or indirectly, 
to the Financial Accounting Standards Board in the amount of 
$200,000 annually in 1973, 1974 and 1975. Other support in 
the form of partner, manager and staff time, travel expenses, 
etc., has been provided by having personnel of our firm work 
on various FASB projects, advisory groups, task forces, etc. 

14. Attached as Exhibit 3 is a listing of the departments, agencies 

or subdivisions of United States Federal, state, municipal or 
other governmental authorities for which our firm performed 
services during our fiscal year ended August 31, 1975. This 
listing is not all-inclusive in that our services to some 
governmental units (e.g., elementary and secondary schools, 
colleges and universities, hospitals and other medical 
facilities, electric, water and gas companies, etc.) may 
be classified in our records in an industry category other 
than government services. A detailed analysis of individual 
clients in various industries would be required in each of 
our offices to be certain that all governmental units for 
which we performed services were included. 

15. Attached as Exhibit 4 is a listing of the United States 

Federal government departments, agencies, subdivisions or 
authorities for which we performed professional services 
during our fiscal years ended March 31, 1971, 1972, 1973 
and 1974, and the five months ended August 31, 1974 (our 
fiscal year was changed from March 31 to August 31 in 1974). 
While we believe that we have included all Federal govern- 
ment services in Exhibit 4, it may not be all-inclusive in 
that some of our services for Federal governmental units 
may be classified in our records in an industry category 
other than Federal government services. 



212 

Page 4 of 4 

ARTHUR ANDERSEN & CO. 

RESPONSE TO QUESTIONNAIRE OF UNITED STATES SENATE 
SUBCOMMITTEE ON REPORTS, ACCOUNTING, AND MANAGEMENT 

16. Our firm's annual revenues (i.e., professional fees) for 

services performed for United States Federal departments, 
agencies, subdivisions or authorities during each of our 
last five fiscal years were as follows: 

Annual Revenues 
Fiscal Year Ended (Professional Fees) 

March 31, 1971 $ 528,000 

March 31, 1972 2,454,000 

March 31, 1973 1,772,000 

March 31, 1974 3,801,000 

Five months ended August 31, 1974 1,099,000 

August 31, 1975 1,197,000 

Restatement of these amounts to a calendar year basis would 
require considerable additional analysis and processing 
of our records. As mentioned in item 15, these amounts 
may not be all-inclusive. 

17. Our firm has a Federal Government Liaison Group in our 

Washington, D.C. office for communication and liaison 
between various Federal government departments and agencies 
and our offices. Mr. Charles A. Bowsher is the partner 
in charge of this group and is located at 1666 K Street, N.W., 
Washington, D.C, 20006 (telephone 785-9510). 



January 29, 1976 



213 



EXHIBIT 1 
Page 1 of 7 



AUDIT CLIENTS OF ARTHUR ANDERSEN & CO. 
LISTED ON THE NEW YORK STOCK EXCHANGE 
AS OF DECEMBER 31, 1975 



COMPANY NAME 



HEADQUARTERS 



A-T-0 INC. 

ABBOTT LABORATORIES 

AIR PRODUCTS £» CHEMICALS, INC. 

ALABAMA POWER CO. 

ALCON LABORATORIES, INC. 

ALLIED PRODUCTS CORPORATION 

AMERICAN BAKERIES COMPANY 

AMERICAN CHAIN L CABLE CO., INC. 

AMERICAN HOME PRODUCTS CORP. 

AMERICAN MEDICAL INTERNATIONAL, INC. 

AMERICAN NATURAL GAS CO. 

AMERICAN SHIP BUILDING CO. (THE) 

AMERICAN STERILIZER COMPANY 

AMERON, INC. 

AMP INCORPORATED 

AMSTAR CORP. 

ANGELICA CORP. 

APACHE CORP. 

APCO OIL CORPORATION 

APPLIED MAGNETICS CORPORATION 

ARA SERVICES, INC. 

ARCTIC ENTERPRISES, INC. 

ASA LTD. 

AVIS, INC. 

BAG HE GROUP INC. 

BARD (C.R.) INC. 

BATH INDUSTRIES, INC. 

BEKER INDUSTRIES CORP. 

BELCO PETROLEUM CORPORATION 

BELL I HOWELL COMPANY 

BLISS £ LAUGHLIN INDUSTRIES INCORPORATED 

BOISE CASCADE CORPORATION 

BRAUN ( C. F. ) & CO. 

BRIGGS & STRATTON CORPORATION 

BROOKLYN UNION GAS CO. (THE) 

BROWNING-FERRIS INDUSTRIES, INC. 

BRUNSWICK CORPORATION 

BUDGET CAPITAL CORPORATION 

BUDGET INDUSTRIES, INC. 

CALIFORNIA-PACIFIC UTILITIES COMPANY 

CANAL-RANDOLPH CORPORATION 

CAROLINA FREIGHT CARRIERS CORPORATION 

CARRIER CORPORATION 



WILLOUGHBY, OHIO 
NORTH CHICAGO, ILL. 
ALLENTOWN, PA. 
BIRMINGHAM, ALA. 
FORT WORTH, TEXAS 
CHICAGO, ILL. 
CHICAGO, ILL. 
BRIDGEPORT, CONN. 
NEW YORK, N.Y. 
BEVERLY HILLS, CALIF. 
NEW YORK, N.Y. 
LORAIN, OHIO 
ERIE, PA. 

MONTEREY PARK, CALIF. 
HARRISBURG, PA. 
NEW YORK, N.Y. 
ST. LOUIS, MO. 
MINNEAPOLIS, MINN. 

HOUSTON, TEXAS 
GOLETA, CALIF. 
PHILADELPHIA, PA. 
THIEF RIVER FALLS, MINN 
JOHANNESBURG, S.AFRICA 
GARDEN CITY, N.Y. 
NEW YORK, N.Y. 
MURRAY HILL, N.J. 
MILWAUKEE, WIS. 
GREENWICH, CONN. 
NEW YORK, N.Y. 
CHICAGO, ILL. 
OAK BROOK, ILL. 
BOISE, IDAHO 
ALHAMBRA, CALIF. 
WAUWATOSA, WIS. 
BROOKLYN, N.Y. 
HOUSTON, TEXAS 
SKOKIE, ILL. 
LOS ANGELES, CALIF. 
LOS ANGELES, CALIF. 
SAN FRANCISCO, CALIF. 
NEW YORK, N.Y. 
CHERRYVILLE, N.C. 
SYRACUSE, N.Y. 



214 



EXHIBIT 1 
Page 2 of 7 



AUDIT CLIENTS OF ARTHUR ANDERSEN & CO. 

LISTED ON THE NEW YORK STOCK EXCHANGE 

AS OF DECEMBER 31, 197$ _ 



COMPANY NAME 



HEADQUARTERS 



CECO CORP. 

CENTEX CORPORATION 

CENTRAL £ SOUTH WEST CORPORATION 

CENTRAL ILLINOIS LIGHT CO. 

CENTRAL ILLINOIS PUBLIC SERVICE CO. 

CENTRAL TELEPHONE & UTILITIES CORP. 

CHAMPION INTERNATIONAL CORPORATION 

CHRIS-CRAFT INDUSTRIES, INC. 

CINCINNATI GAS & ELECTRIC CO. (THE) 

CMI INVESTMENT CORP. 

COLGATE-PALMOLIVE COMPANY 

COLLINS FOOD INTERNATIONAL, INC . 

COLT INDUSTRIES INC. 

COLUMBIA GAS SYSTEM, INC. 

COLUMBUS L SOUTHERN OHIO ELECTRIC CO. 

COMBUSTION ENGINEERING, INC. 

COMMONWEALTH EDISON CO. 

COMPUGRAPHIC CORP. 

CONSOLIDATED FOODS CORP. 

CONSOLIDATED FREIGHTWAYS, INC. 

CONSUMERS POWER COMPANY 

CONTINENTAL ILLINOIS REALTY 

CONTINENTAL TELEPHONE CORPORATION 

COOK UNITED INC. 

CORDURA CORP. 

COUSINS MORTGAGE £ EQUITY INVESTMENTS 

CROCKER NATIONAL CORPORATION 

CULLIGAN INTERNATIONAL COMPANY 

CUMMINS ENGINE CO., INC. 

CUNNINGHAM DRUG STORES, INC. 

CUTLER-HAMMER, INC. 

DAYTON POWER & LIGHT CO. (THE) 

DELTA AIR LINES, INC. 

DICK (A.B.) CO. 

DISSTON INC. 

DONNELLEY (R.R.) & SONS COMPANY 

DCRSEY CORPORATION (THE) 

DRESSER INDUSTRIES, INC. 

DYMO INDUSTRIES, INC. 

EASTERN GAS L FUEL ASSOCIATES 

EG&G INC. 

ELECTRONIC ASSOCIATES, INC. 

ELIXIR INDUSTRIES 



CHICAGO, ILL. 
DALLAS, TEXAS 
WILMINGTON, DEL. 
PEORIA, ILL. 
SPRINGFIELD, ILL. 
LINCOLN, NEBRASKA 
NEW YORK, N.Y. 
NEW YORK, N.Y. 
CINCINNATI, OHIO 
MADISON, WIS. 
NEW YORK, N.Y. 
LOS ANGELES, CALIF. 
NEW YORK, N.Y. 
WILMINGTON, DEL. 
COLUMBUS, OHIO 
STAMFORD, CONN. 
CHICAGO, ILL. 
WILMINGTON, MASS. 
CHICAGO, ILL. 
SAN FRANCISCO, CALIF. 
JACKSON, MICH. 
LOS ANGELES, CALIF. 
MERRIFIELD, VA. 
MAPLE HEIGHTS, OHIO 
CHICAGO, ILL. 
ATLANTA, GA. 
SAN FRANCISCO, CALIF. 
NORTHBROOK, ILL. 
COLUMBUS, IND. 
DETROIT, MICH. 
MILWAUKEE, WIS. 
DAYTON, OHIO 
ATLANTA, GA. 
CHICAGO, ILL. 
PITTSBURGH, PA. 
CHICAGO, ILL. 
CHATTANOOGA, TENN. 
DALLAS, TEXAS 
SAN FRANCISCO, CALIF. 
BOSTON, MASS. 
BEDFORD, MASS. 
WEST LONG BRANCH, N.J, 
GARDENA, CALIF. 



215 



AUDIT CLIENTS OF ARTHUR ANDERSEN 4 CO. 
LISTED ON THE MEW YORK STOCK EXCHANGE 
AS OF DECEMBER 31, 197$ 



EXHIBIT 1 
Page 3 of 7 



COMPANY NAME 



HEADQUARTERS 



ENGELHARD MINERALS & CHEMICALS CORP. 

ENTEX, INC. 

ESTERLINE CORP. 

EXCELSIOR INCOME SHARES 

FEDERAL COMPANY 

FEDERAL SIGNAL CORPORATION 

FIRST CHICAGO CORP. 

FIRST INTERNATIONAL bANCSHARES, INC. 

FIRST UNION REAL ESTATE EQUITY £1 MORT. INV 

FIRST WISCONSIN MORTGAGE TRUST 

FLEETWOOD ENTERPRISES 

FL&XI-VAN CORPORATION 

FLORIDA GAS CO. 

FLORIDA POWER CORPORATION 

FOOTE, CONE L BELDING COMMUNICATIONS, INC. 

FORT HOWARD PAPER COMPANY 

GARDNER-DENVER COMPANY 

GENERAL DYNAMICS CORP. 

GENERAL PORTLAND, INC. 

GENERAL TELEPHONE L ELECTRONICS CORP. 

GENERAL TELEPHONE COMPANY OF FLORIDA 

GEORGIA POWER COMPANY 

GEORGIA-PACIFIC CORP. 

GETTY OIL COMPANY 

GREAT NORTHERN NEKOOSA CORP. 

GROLIER INCORPORATED 

GULF RESOURCES & CHEMICAL CORP. 

HALLIBURTON COMPANY 

HARCUURT, 8RACE JOVANOVICH, INC. 

HAZELTINE CORPORATION 

HEILEMAN (G.) BREWING CO. 

HELLER (WALTER E.) INTERNATIONAL CORP. 

HELMERICH L PAYNE, INC. 

HEkSHEY FOODS CORPORATION 

HOFFMAN ELECTRONICS CORPORATION 

HOLIDAY INNS, INC. 

HUBBARD REAL ESTATE INVESTMENTS 

HuTTON (E.F.) GROUP, INC. (THE) 

ILLINOIS TOOL WORKS, INC. 

INDIANA GAS CO. 

INEXCO OIL CO. 

INSTITUTIONAL INVESTORS TRUST 



NEW YORK, N.Y. 
HOUSTON, TEXAS 
NEW YORK, N.Y. 
NEW YORK, N.Y. 
MEMPHIS, TENN. 
CHICAGO, ILL. 
CHICAGO, ILL. 
DALLAS, TEXAS 
CLEVELAND, OHIO 
MILWAUKEE, WIS. 
RIVERSIDE, CALIF. 
NEW YORK, N.Y. 
WINTER PARK, FLA. 
ST. PETERSBURG, FLA 
CHICAGO, ILL. 
GREEN BAY, WIS. 
DALLAS, TEXAS 
ST. LOUIS, MO. 
DALLAS, TEXAS 
STAMFORD, CONN. 
TAMPA, FLA. 
ATLANTA, GA. 
PORTLAND, OREGON 
LOS ANGELES, CALIF. 
STAMFORD, CONN. 
NEW YORK, N. Y. 
HOUSTON, TEXAS 
DALLAS, TEXAS 
NEW YORK, N.Y. 
GREENLAWN, N.Y. 
LA CROSSE, WIS. 
CHICAGO, ILL. 
TULSA, OKLA. 
HERSHEY, PA. 
EL MONTE, CALIF. 
MEMPHIS, TENN. 
BOSTON, MASS. 
NEW YORK, N.Y. 
CHICAGO, ILL. 
INDIANAPOLIS, IND. 
HOUSTON, TEXAS 
BOSTON, MASS. 



216 



AUDIT CLIENTS OF ARTHUR ANDERSEN & CO. 

LISTED ON THE NEW YORK STOCK EXCHANGE 

AS OF DECEMBER 31, 197$ 



EXHIBIT 1 
Page 4 of 7 



COMPANY NAME 



HEADQUARTERS 



INTERNATIONAL PAPER COMPANY 

INTERNATIONAL TELEPHONE & TELEGRAPH CORP, 

IOWA ELECTRIC LIGHT L POWER COMPANY 

IOWA POWER L LIGHT COMPANY 

IOwA PUBLIC SERVICE COMPANY 

IOWA-ILLINOIS GAS & ELECTRIC CO. 

ITE IMPERIAL CORPORATION 

ITEK CORPORATION 

ITT CONSUMER SERVICES CORPORATION 

JAMES (FRED S.) L COMPANY, INC. 

KANSAS CITY POWER I LIGHT CO. 

KANSAS POWER & LIGHT CO. 

KANSAS-NEBRASKA NATURAL GAS COMPANY, INC, 

KEENE CORP. 

KENNAMETAL, INC. 

KENTUCKY UTILITIES CO. 

KERR MCGEE CORP. 

KIODE (WALTER) L COMPANY INC. 

KIRSCH CO. 

KOEHRING CO. 

KRAFTCO CORP. 

LEVI STRAUSS & CO. 

LFE CORP. 

LOUISIANA-PACIFIC CORP. 

LOUISVILLE GAS & ELECTRIC CO. 

LUKENS STEEL COMPANY 

MACKE COMPANY (THE) 

MARCOR INC. 

MAREMONT CORPORATION 

MARSH & MCLENNAN COMPANIES, INC. 

MARLEY COMPANY (THE) 

MARQUETTE CEMENT MFG. CO. 

MARRIOTT CORP. 

MARSHALL FIELD £ CO. 

MASONITE CORPORATION 

MAY DEPARTMENT STORES CO. 

MCGRAW EDISON CO. 

MEI CORPORATION 

MERCANTILE STORES COMPANY, INC. 

MERCK £ CO., INC. 



NEW YORK, N.Y. 
NEW YORK, N.Y. 
CEDAR RAPIDS, IOWA 
DES MOINES, IOWA 
SIOUX CITY, IOWA 
DAVENPORT, IOWA 
SPRING HOUSE, PA. 
LEXINGTON, MASS. 
NEW YORK, N.Y. 
CHICAGO, ILL. 
KANSAS CITY, MO. 
TOPEKA, KANSAS 
HASTINGS, NEBRASKA 
NEW YORK, N.Y. 
LATROBE, PA. 
LEXINGTON, KY. 
OKLAHOMA CITY, OKLA. 
CLIFTON, N.J. 
STURGIS, MICH. 
MILWAUKEE, WIS. 
GLENVIEW, ILL. 
SAN FRANCISCO, CALIF, 
WALTHAM, MASS. 
PORTLAND, OREGON 
LOUISVILLE, KY. 
COATESVILLE, PA. 
CHEVERLY, MD . 
CHICAGO, ILL. 
CHICAGO, ILL. 
CHICAGO, ILL. 
MISSION, KANSAS 
NASHVILLE, TENN. 
WASHINGTON, D.C. 
CHICAGO, ILL. 
CHICAGO, ILL. 
ST. LOUIS, MO. 
ELGIN, ILL. 
MINNEAPOLIS, MINN. 
WILMINGTON, DEL. 
RAHWAY, N.J. 



217 



AUDIT CLIENTS OF ARTHUR ANDERSEN & CO. 
LISTED ON THE NEW YORK STOCK EXCHANGE 
AS OF DECEMBER 31, 1975 



EXHIBIT 1 
Page 5 of 7 



COMPANY NAME 



HEADQUART 



R S 



MESA PETROLEUM CO. 

METRO-GOLDWYN-MAYER, INC. 

MICHIGAN GAS UTILITIES COMPANY 

MIRRO ALUMINUM CO. 

MISSOURI PUBLIC SERVICE CO. 

MOHAWK DATA SCIENCES CORP. 

MOORE MCCORMACK RESOURCES INC. 

MUTUAL OF OMAHA INTEREST SHARES 

NATIONAL MEDICAL CARE INC. 

NATIONAL SERVICE INDUSTRIES, INC. 

NATIONAL TEA CO. 

NATOMAS COMPANY 

NEVADA POWER COMPANY 

NEW tNGLAND GAS L ELECTRIC ASSN. 

NEWMONT MINING CORP. 

NORTHERN ILLINOIS GAS CO. 

NORTHERN INDIANA PUBLIC SERVICE CO 

NORTHERN NATURAL GAS CO. 

NORTHWEST INDUSTRIES, INC. 

NORTHWEST ENERGY COMPANY 

NORTHWESTERN STEEL L WIRE CO. 

OAK INDUSTRIES, INC. 

OCCIDENTAL PETROLEUM CORP. 

OHIO EDISON COMPANY 

OKLAHOMA GAS & ELECTRIC CO. 

OUTBOARD MARINE CORP. 

OWENS-CORNING FIBERGLAS CORP. 

PAR&AS INC. 

PARKER PEN COMPANY 

PASCO, INC. 

PENNWALT CORP. 

PENNZCIL COMPANY 

PEOPLES DRUG STORES, INC. 

PEOPLES GAS COMPANY 

PORTLAND GENERAL ELECTRIC CO. 

PUBLIC SERVICE CO. OF INDIANA, INC 

QUAKER OATS COMPANY 

REECE CORPORATION (THE) 

RELIABLE STORES CORPORATION 

REPUBLIC CORPORATION 

REPUBLIC MORTGAGE INVESTORS 

RETAIL CREDIT COMPANY 

REXNORD, INC. 

RICHARDSON CO. 

RIEGEL TEXTILE CORPORATION 



AMARILLO, TEXAS 
CULVER CITY, CALIF. 
MONROE, MICH. 
MANITOWOC, WIS. 
KANSAS CITY, MO. 
UTICA, N.Y. 
STAMFORD, CONN. 
OMAHA, NEBRASKA 
BROOK LINE, MASS. 
ATLANTA, GA. 
ROSEMONT, ILL. 
SAN FRANCISCO, CALIF 
LAS VAGAS, NEVADA 
CAMBRIDGE, MASS. 
NEW YORK, N.Y. 
AURORA, ILL. 
HAMMOND, IND. 
OMAHA, NEBRASKA 
CHICAGO, ILL. 
SALT LAKE CITY, UTAH 
STERLING, ILL. 
CRYSTAL LAKE, ILL. 
LOS ANGELES, CALIF. 
AKRON, OHIO 
OKLAHOMA CITY, OKLA. 
WAUKEGAN, ILL. 
TOLEDO, OHIO 
WALDORF, MD. 
JANESVILLE, WIS. 
NEW YORK, N.Y. 
PHILADELPHIA, PA. 
HOUSTON, TEXAS 
WASHINGTON, D.C. 
CHICAGO, ILL. 
PORTLAND, OREGON 
PLAINFIELD, IND. 
CHICAGO, ILL. 
WALTHAM, MASS. 
BALTIMORE, MD . 
LOS ANGELES, CALIF. 
CORAL GABLES, FLA. 
ATLANTA, GA. 
MILWAUKEE, WIS. 
DES PLAINES, ILL. 
NEW YORK, N.Y. 



218 



AUDIT CLIENTS OF ARTHUR ANDERSEN & CO. 
LISTED ON THE NEW YORK STOCK EXCHANGE 
AS OF DECEMBER 31, 1975 



EXHIBIT 1 
Page 6 of 7 



COMPANY NAME 



HEADQUARTERS 



SARGENT-WELCH SCIENTIFIC CO. 

SCHLITZ (JOS.) BREWING COMPANY 

SCOTT, FORESMAN & COMPANY 

SCOTTY'S INC. 

SEALED POWER CORP. 

SEARLE (G. D.) & CO. 

SIGNODE CORP. 

SKELLY OIL COMPANY 

SMITH INTERNATIONAL, INC. 

SOUTHERN CALIFORNIA EDISON CO. 

SOUTHERN COMPANY (THE) 

SOUTHERN INDIANA GAS L ELECTRIC CO. 

ST. JOSEPH LIGHT S. POWER CO. 

STANDARD BRANDS, INC. 

STANRAY CORPORATION 

STEWART-WARNER CORPORATION 

STORAGE TECHNOLOGY CORP. 

STUDEBAKER-WORTHINGTON, INC. 

SUAVE SHOE CORP. 

SUN CHEMICAL CORPORATION 

SUPERIOR OIL COMPANY 

TAPPAN COMPANY (THE) 

TELEDYNE INC. 

TENNECO, INC. 

TEXACO, INC. 

TEXAS GAS TRANSMISSION CORP. 

THRIFTY DRUG STORES CO., INC. 

TIGER INTERNATIONAL, INC. 

TOLEDO EDISON COMPANY 

TRANS UNION CORP. 

TRANSCO COMPANIES INC. 

TRIANGLE PACIFIC CORP. 

U.S. HOME CORPORATION 

UAL INC. 

UARCO INCORPORATED 

UNARCO INDUSTRIES, INC. 

UNION COMMERCE CORP. 

UNITED GAS PIPE LINE COMPANY 

UNITED STATES GYPSUM CO. 

UNITED STATES SHOE CORP. 

UNIVAR CORPORATION 

UNIVERSAL OIL PRODUCTS CO. 

UTAH INTERNATIONAL, INC. 

VENDO COMPANY 

VSI CORP. 



SKOKIE, ILL. 
MILWAUKEE, WIS. 
GLENVIEW, ILL. 
WINTER HAVEN, FLA. 
MUSKEGON, MICH. 
SKOKIE, ILL. 
GLENVIEW, ILL. 
TULSA, OKLA. 
NEWPORT BEACH, CALIF. 
ROSEMEAD, CALIF. 
ATLANTA, GA. 
EVANSVILLE, IND. 
ST. JOSEPH, MO. 
NEW YORK, N.Y. 
CHICAGO, ILL. 
CHICAGO, ILL. 
LOUISVILLE, COLO. 
NEW YORK, N.Y. 
MIAMI LAKES, FLA. 
NEW YORK, N.Y. 
HOUSTON, TEXAS 
MANSFIELD, OHIO 
LOS ANGELES, CALIF. 
HOUSTON, TEXAS 
NEW YORK, N.Y. 
OWENSBORO, KY. 
LOS ANGELES, CALIF. 
LOS ANGELES, CALIF. 
TOLEDO, OHIO 
LINCOLNSHIRE, ILL. 
HOUSTON, TEXAS 
GREAT NECK, N.Y. 
CLEARWATER, FLA. 
CHICAGO, ILL. 
BARRINGTON, ILL. 
CHICAGO, ILL. 
CLEVELAND, OHIO 
HOUSTON, TEXAS 
CHICAGO, ILL. 
CINCINNATI, OHIO 
SEATTLE, WASH. 
DES PLAINES, ILL. 
SAN FRANCISCO, CALIF. 
KANSAS CITY, MO. 
PASADENA, CALIF. 



219 



EXHIBIT 1 
Page 7 of 7 



AUDIT CLIENTS OF ARTHUR ANDERSEN & CO. 
LISTED ON THE NEW YORK STOCK EXCHANGE 
AS OF DECEMBER 31, 1975 



COMPANY NAME 



HEADQUARTERS 



WALGREEN COMPANY 

WALLACE BUSINESS FORMS, INC. 

WALLACE-MURRAY CORP. 

WARNER COMPANY 

WASHINGTON GAS LIGHT CO. 

WASTE MANAGEMENT, INC. 

WELLS FARGO MORTGAGE INVESTORS 

WEYENBERG SHOE MANUFACTURING COMPANY 

WEYERHAEUSER CO. 

WHEELABRATOR-FRYE INC. 

WIT.SHIRE OIL COMPANY OF TEXAS 

WISCONSIN GAS CO. 

WISCONSIN PUBLIC SERVICE CORP. 

XTRA, INC. 

ZAPATA, INC. 

ZENITH RADIO CORPORATION 



CHICAGO, ILL. 
HILLSIDE, ILL. 
NEW YORK, N.Y. 
PHILADELPHIA, PA. 
WASHINGTON, D.C. 
OAK BROOK, ILL. 
LOS ANGELES, CALIF. 
MILWAUKEE, WIS. 
TACOMA, WASH. 
NEW YORK, N.Y. 
MEW YORK, N.Y. 
MILWAUKEE, WIS. 
GREEN BAY, WIS. 
BOSTON, MASS. 
HOUSTON, TEXAS 
CHICAGO, ILL. 



67-159 O - 77 - 16 



220 



AUDIT CLIENTS OF ARTHUR ANDERSEN & CO. 
LISTED ON THE AMERICAN STOCK EXCHANGE 
AS OF DECEMBER 31, 1975 



EXHIBIT 2 
Page 1 of 5 



COMPANY NAME 



HEADQUARTERS 



A L E PLASTIC PAK CO., INC. 

AAR CORP. 

ACME PRECISION PROOUCTS INC. 

AEGIS CORPORATION 

AERO-FLOW DYNAMICS, INC. 

AFFILIATED PUBLICATIONS, INC. 

AMERICAN FLETCHER MORTGAGE INVESTORS 

AMERICAN GARDEN PRODUCTS, 1NL. 

AMERICAN SCIENCE & ENGINEERING INC. 

AMERICAN TRAINING SERVICES INC. 

ARGUS, INC. 

ARMIN CORP. 

ATALANTA CORP. 

AUSTRAL OIL CO. INC. 

BANNER INDUSTRIES, INC. 

BARNES ENGINEERING CO. 

BAYROCK UTILITY SECURITIES 

BUILDEX INC. 

BURNS INTERNATIONAL SECURITY SERVICES, INC 

C & K PETROLEUM, INC. 

CAMCO INC. 

CANADIAN OCCIDENTAL PETROLEUM 

CAROLINA PIPELINE CO. 
^CARRIER CORPORATION 

CASTLE (A.M.) C CO. 

CASTLEWOOD INTERNATIONAL CORP. 

CAVITRON CORP. 

CENTRAL POWER £ LIGHT CO. (TEXAS) 

CETEC CORP. 
*CMI INVESTMENT CORP. 

COLE NATIONAL CORP. 

COMMODORE BUSINESS MACHINES (CANADA) 

COMMODORE CORPORATION (THE) 
CONCHEMCO INC. (DEL) 
^CONTINENTAL TELEPHONE CORPORATION 

CORE LABORATORIES INC. 
*COUSINS MORTGAGE £ EQUITY INVESTMENTS 



LTD. 



INDUSTRY, CALIF. 

ELK GROVE VILLAGE, ILL. 

DETROIT, MICH. 

CORAL GABLES, FLA. 

LINDEN, N.J. 

BOSTON, MASS. 

BOSTON, MASS. 

DGSTGin, MASS. 

MB RIDGE, MASS. 

CHERRY HILL, N.J. 
ANN ARBOR, MICH. 
JERSEY CITY, N.J. 
NEW YORK, N.Y. 
HOUSTON, TEXAS 
CLEVELAND, OHIO 
STAMFORD, CONN. 
NEW YORK, N.Y. 
HUNTINGTON, N.Y. 
8RIARCLIFF, N.Y. 
HOUSTON, TEXAS 
HOUSTON, TEXAS 
CALGARY, ALBERTA 
COLUMBIA, S.C. 
SYRACUSE, N.Y. 
FRANKLIN PARK, ILL. 
MIAMI, FLA. 

LONG ISLAND CITY, N.Y. 
CORPUS CHRISTI, TEXAS 
SOUTH EL MONTE, CALIF. 
MADISON, WIS. 
CLEVELAND, OHIO 
PALO ALTO, CALIF. 
OMAHA, NEBRASKA 
SHAWNEE MISSION, KANSAS 
MERRIFIELD, VA. 
DALLAS, TEXAS 
ATLANTA, GA . 



* The common stock of this company is listed on the New York Stock Exchange 
(Exhibit 1), and either preferred stock or warrants of the company 
are listed on the American Stock Exchange. 



221 



EXHIBIT 2 
Page 2 of 5 



AUDIT CLIENTS OF ARTHUR ANDERSEN i CO. 
LISTED ON THE AMERICAN STOCK EXCHANGE 
AS OF DECEMBER 31, 1975 



COMPANY NAME 



HEADQUARTERS 



CRAMER ELECTRONICS INC. 

DAMSON OIL CORPORATION 

DE ROSE INDUSTRIES INC. 

DEPOSITORS CORP. 

DYNALECTRON CORP. 

ECODYNE CORP. 

ELCOR CHEMICAL CORP. 

ELECTRONIC ASSISTANCE CORP. 

ESSEX CHEMICAL CORP. 

EUTHENICS SYSTEMS CORPORATION 

FABRI-CENTERS OF AMERICA INC. 

FALCON SEABOARD INC. 

FELMONT OIL CORP. 

FILMWAYS, INC. 

FINANCIAL GENERAL BANKSHARES, INC, 

FIRST HARTFORO CORP. 

FIRST VIRGINIA MORTGAGE £ R.E.I.T, 

FOOTE MINERAL COMPANY 

FRANTZ MANUFACTURING CO. 

FRIGITEMP CORP. 
GABRIEL INDUSTRIES, INC 
GENERAL RECREATION INC. 
GENERAL RESEARCH CORP. 
GEON INDUSTRIES INC. 
GLADDING CORP. 
GLASROCK PRODUCTS, INC. 
GLOBE INDUSTRIES, INC. 

GLOUCESTER ENGINEERING CO., INC. 

GOLDBLATT BROS., INC. 

GOLDEN WEST MOBILE HCMES INC. 

GREAT BASINS PETROLEUM CO. 

GTI CORP. 

GUILFORD MILLS, INC. 

GULF REPUBLIC FINANCIAL CORP. 

HARVEY'S STORES, INC. 

HI-SHEAR CORP. 

HOTEL INVESTORS (THE) 

INCOTERM CORPORATION 



NEWTON, MASS. 
NEW YORK, N.Y. 
INDIANAPOLIS, IND. 
AUGUSTA, MAINE 
WASHINGTON, D.C. 
LINCOLNSHIRE, ILL. 
MIDLAND, TEXAS 
PARAMUS, N.J. 
CLIFTON, N.J. 
BEAVER, PA. 
BEACHWOOD, OHIO 
HOUSTON, TEXAS 
NEW YORK, N.Y. 
LOS ANGELES, CALIF. 
WASHINGTON, D.C. 
MANCHESTER, CONN. 
FALLS CHURCH, VA . 
EXTON, PA. 
STERLING, ILL. 
NEW YORK, N.Y. 
NEW YORK, N.Y. 
ALBUQUERQUE, N.M. 
SANTA BARBARA, CALIF. 
WOODBURY, N.Y. 
BOSTON, MASS. 
ATLANTA, GA. 
CHICAGO, ILL. 
GLOUCESTER, MASS. 

CHICAGO, ILL. 
SANTA ANA, CALIF. 
LOS ANGELES, CALIF. 
PITTSBURGH, PA. 
GREENSBORO, N.C. 
HOUSTON, TEXAS 
NEW YORK, N.Y. 
TORRANCE, CALIF. 
KENSINGTON, MD . 
NATTICK, MASS. 



222 



EXHIBIT 2 
Page 3 of 5 



AUDIT CLIENTS OF ARTHUR ANDERSEN & CO. 
LISTED ON THE AMERICAN STOCK EXCHANGE 
AS OF DECEMBER 31, 1975 



COMPANY NAM 



HEADQUARTERS 



INLAND CREDIT CORP. 

INSTRUMENT SYSTEMS CORP. 

INTFRMFDCO, INC. 

INTERNATIONAL ALUMINUM CORPORATION 

INTERNATIONAL GENERAL INDUSTRIES* INC 

INTERPHOTO CORP. 

INTERPOOL LTD. 

ITI CORP. 

JACOBS ENGINEERING GROUP, INC. 

K-TEL INTERNATIONAL INC. 

KEYSTONE INDUSTRIES INC. 

KING RADIO CORP. 

KIRBY INDUSTRIES, INC. 

KLEINERT'S INC. 

KLIKLOK CORP. 

LCA CORP. 

LOUISIANA GENERAL SERVICES, INC. 

MARK CONTROLS CORP. 

MARSHALL INDUSTRIES 

MEDALIST INDUSTRIES INC. 

MICHIGAN GENERAL CORP. 

MITCHELL ENERGY £ DEVELOPMENT 

MODERN MAID FOOD PRODUCTS INC. 

MULTI-AMP CORP. 

NELSON (L.B.) CO. 

NOEL INDUSTRIES, INC. 

NORTEK INC. 

NORTH AMERICAN ROYALTIES INC. 

NORTHERN INDIANA PUBLIC SERVICE CO. 

OAKWOOD HOMES CORP. 

ORMAND INDUSTRIES INC. 

OUTDOOR SPORTS INDUSTRIES, INC. 

PACIFIC HOLDING CORP. 

PARKWAY DISTRIBUTORS, INC. 

PAXALL, INC. 

PENN. REAL ESTATE INVESTMENT TRUST 

PERINI CORPORATION 

PERTEC CORP. 



NEW YORK, N.Y. 
HUNTINGTON, N.Y. 
HOUSTON, TEXAS 

MONTEREY PARK, CALIF. 

WASHINGTON, D.C. 
LONG ISLAND CITY, N.Y, 
NEW YORK, N.Y. 
CINCINNATI, OHIO 
PASADENA, CALIF. 
MINNEAPOLIS, MINN. 
CHICAGO, ILL. 
OLATHE, KANSAS 
HOUSTON, TEXAS 
NEW YORK, N.Y. 
GREENWICH, CONN. 
BALA CLNWYD, PA. 
HARVEY, LA. 
EVANSTON, ILL. 
EL MONTE, CALIF. 
MILWAUKEE, WIS. 
DALLAS, TEXAS 
HOUSTON, TEXAS 
GARDEN CITY, N.Y. 
DALLAS, TEXAS 
MENLO PARK, CALIF. 
NEW YORK, N.Y. 
CRANSTON, R.I. 
CHATTANOOGA, TENN. 
HAMMOND, IND. 
GREENSBORO, N.C. 
LOS ANGELES, CALIF. 
DENVER, COLO. 
LOS ANGELES, CALIF. 
HOLBROOK, MASS. 
SKOKIE, ILL. 
WYNCOTE, PA. 
FRAMINGHAM, MASS. 
EL SEGUNDO, CALIF. 



* The common stock of this company is listed on the New York Stock Exchange 
(Exhibit 1), and either preferred stock or warrants of the company 
are listed on the American Stock Exchange. 



223 



EXHIBIT 2 
Page A of 5 



AUDIT CLIENTS OF ARTHUR ANDERSEN & CO. 
LISTED ON THE AMERICAN STOCK EXCHANGE 
AS OF DECEMBER 31, 1975 



COMPANY NAME 



HEADQUARTERS 



PETRO-LEWIS CORPORATION 

PIONEER SYSTEMS, INC. 

PIONEER TEXAS CORP. 

PLANT INDUSTRIES, INC. (DEL) 

POLYCHROME CORP. 

PRUDENTIAL BLDG. MAINTENANCE CORP. 

REAL ESTATE INVESTMENT TRUST OF AMER 

REALTY REFUND TRUST 

REIT INCOME FUND INC. 

REPUBLIC MORTGAGE INVESTORS 

RICHTON INTERNATIONAL CORP. 

RTi FY m. (THE) 

INTERNATIONAL 

RSC INDUSTRIES 
RYERSCN £ HAYNES, INC. 
SALEM CORPORATION 
SCIENTIFIC-ATLANTA, INC. 
SCRIVNER INC. 

SECURITY MCRTGAGE INVESTGRS 
SEMTECH CORPORATION 
SERVO CORP. OF AMERICA 
SHAW INDUSTRIES, INC. 
SHENANDOAH OIL CORP. 
SHERWOOD MEDICAL INDUSTRIES INC. 
SIFCO INDUSTRIES, INC. 
*SOUTHERN r.4ITPnPMT A pnTSON CO. 
SPEED-O-PPINT BUSINESS MACHINES CORP, 
SPLENTEX INC. 
STANDARD METALS CORP. 
STANDARD PRODUCTS CO. (THE) 
STANDARD-PACIFIC CORP. 
STATE SAVINGS L LOAN ASSOCIATION 
STELLAR INDUSTRIES, INC. 
STEPAN CHEMICAL CO. 
STERLING ELECTRONICS CORPORATION 



DENVER, COLO. 
MANCHESTER, CONN. 
DALLAS, TEXAS 
ANAHEIM, CALIF. 
YONKERS, N.Y. 
NEW YORK, N.Y. 
BOSTON, MASS. 
CLEVELAND, OHIO 
BOSTON, MASS. 
CORAL GABLES, FLA. 
NEW YORK, N.Y. 
PARK RIDGE, ILL. 
PALO ALTO, CALIF. 
HIALEAH, FLA. 
JACKSON, MICH. 
PITTSBURGH, PA. 
ATLANTA, GA . 
OKLAHOMA CITY, OKLA 
BOSTON, MASS. 
NEWBURY PARK, CALIF 
HICKSVILLE, N.Y. 
DALTON, GA. 
FORT WORTH, TFXAS 
ST. LOUIS, MO. 
CLEVELAND, OHIO 
ROSEMEAD, CALIF. 

CHICAGO, ILL. 
NEW YORK, N.Y. 
DENVER, COLO. 
CLEVELAND, OHIO 
COSTA MESA, CALIF. 
STOCKTON, CALIF. 
BUENA PARK, CALIF. 
NORTHFIELD, ILL. 
HOUSTON, TEXAS 



*- The common stock of this company is listed on the New York Stock Exchange 
(Exhibit 1), and either preferred stock or warrants of the company- 
are listed on the American Stock Exchange. 



224 



EXHIBIT 2 
Page 5 of 5 



AUDIT CLIENTS OF ARTHUR ANDERSEN & CO. 
LISTED ON THE AMERICAN STOCK EXCHANGE 
AS OF DECEMBER 31, 1975 



COMPANY NAME 



HEADQUARTERS 



STEVCOKNIT INC. 
SUN FI.FCTRTC CORP. 

SUNAIR ELECTRONICS, INC. 

SUPER FOOD SERVICES, INC. 

SUPERIOR INDUSTRIES INTERNATIONAL 

SW INDUSTRIES INC. 

TECHNICAL OPERATIONS, INC. 

TENNECO, INC. 

TENNESSEE FORGING STEEL CORP. 

TIGER INTERNATIONAL, INC. 

TMC MORTGAGE INVESTORS 

TOLEDO EDISON COMPANY 

TORIN CORP. 

U.I. P. CORPORATION 

U.S. LEASING REAL ESTATE INVESTORS 

UNION INVESTMENT CO. 

UNIVERSAL RESOURCES CORP. 

URS CORP. 

VESELY COMPANY 

WACKENHUT CORP. (THE) 

WAINOCO OIL CO., LTD. 

WEST TEXAS UTILITIES CO. 

WESTATES PETROLEUM CO. 

WHITAKER CABLE CORP. 
WILSHIRE OIL CO. OF TEXAS 
WINKELMAN STORES, INC. 
WISCONSIN POWER £ LIGHT CO. 
WYLE LABORATORIES 



INC 



NEW YORK, N.Y. 
CHICAGO, ILL. 

FORT LAUDERDALE, FLA. 

DAYTON, OHIO 

VAN NUYS, CALIF. 

PROVIDENCE, R.I. 

BOSTON, MASS. 

HOUSTON, TEXAS 

HARRIMAN, TENN. 

LOS ANGELES, CALIF. 

BOSTON, MASS. 

TOLEDO, OHIO 

TORRINGTON, CONN. 

ELK GROVE VILLAGE, ILL, 

SAN FRANCISCO, CALIF. 

BIRMINGHAM, MICH. 

DALLAS, TEXAS 

SAN MATEO, CALIF. 

LAPEER, MICH. 

CORAL GABLES, FLA. 

HOUSTON, TEXAS 

ABILENE, TEXAS 

LOS ANGELES, CALIF. 

NORTH KANSAS CITY, MO. 
NEW YORK, N.Y. 
DETROIT, MICH. 
MADISON, WIS. 
EL SEGUNDO, CALIF. 



* The common stock of this company is listed on the New York Stock Exchange 
(Exhibit 1), and either preferred stock or warrants of the company 
are listed on the American Stock Exchange. 



225 



EXHIBIT 3 
Page 1 of 6 

LISTING OF DEPARTMENTS, AGENCIES OR SUBDIVISIONS OF UNITED STATES 
FEDERAL, STATE OR LOCAL GOVERNMENTAL AUTHORITIES 
FOR WHICH ARTHUR ANDERSEN & CO. PERFORMED SERVICES 
DURING THE FISCAL YEAR ENDED AUGUST 31, 197$ 



Federal Government 

Department of Commerce 
Department of the Interior 
Department of Justice - 

U.S. Attorney of Bergen County, New Jersey 
Department of Transportation 
Department of the Treasury 
Department of the Navy 
Federal Energy Administration 
Federal Home Loan Bank Board 
Federal Home Loan Mortgage Corporation 
Federal Reserve System 
General Accounting Office 
General Services Administration 
National Aeronautics and Space Administration 
National Railroad Passenger Corporation 
Panama Canal Company 
Social Security Administration 
U.S. Agency for International Development 



tate Government 

Alabama - Commission on Aging 

- Department of Health 

Alaska - The North Commission 

Arizona - Auditor General 

Colorado - State Supreme Court 

Connecticut - State Election Commission 

Georgia - Department of Human Resources 

Illinois - Building Authority 

- Department of Finance 

- Department of Labor 

- Health Facilities Authority 

- Illinois Housing Development Authority 

- Illinois Racing Board 

- Office of Comptroller 

- State Department of Health 

- State Fair Agency 

- State Treasury Department 

- Technical Assistance Corporation for Housing 



226 



EXHIBIT 3 
Page 2 of 6 

LISTING OF DEPARTMENTS, AGENCIES OR SUBDIVISIONS OF UNITED STATES 
FEDERAL, STATE OR LOCAL GOVERNMENTAL AUTHORITIES 
FOR WHICH ARTHUR ANDERSEN & CO. PERFORMED SERVICES 
DURING THE FISCAL YEAR ENDED AUGUST 31, 1975 

State Government (continued) 

Louisiana - Division of Administration 

Maine - Balanced Growth for Maine 

- Data Processing Services 

Maryland - Mass Transit Administration 

Massachusetts - Department of Welfare 

- Economic Development and Industrial Corp. 

Michigan - Department of Administration 

- Department of Management and Budget 

- Department of Public Health 

- Housing Development Authority 

Mississippi - Department of Public Welfare 

Missouri - Division of Commerce and Industrial Development 

- Division of Liquor Control 

- Office of Administration 

Nebraska - Department of Administrative Services 

- Department of Public Institutions 

New Hampshire - Central Data Processing Department 

New Jersey - Department of Institutions and Agencies 

- Division of Investments 

- Health Care Facilities Financing Authority 

- State Auditor 

New York - Department of Audit 

North Dakota - Department of Accounts and Purchases 

- State Highway Department 

Ohio - Bureau of Workman's Compensation 

- Finance Department 

- Ohio Building Authority 

Oregon - Mental Health Division 

Pennsylvania - Bureau of Financial Management 

- Office of Administration 



227 



EXHIBIT 3 
Page 3 of 6 



LISTING OF DEPARTMENTS, AGENCIES OR SUBDIVISIONS OF UNITED STATES 
FEDERAL, STATE OR LOCAL GOVERNMENTAL AUTHORITIES 
FOR WHICH ARTHUR ANDERSEN & CO. PERFORMED SERVICES 
DURING THE FISCAL YEAR ENDED AUGUST 31, 1975 



State Government (continued) 

South Carolina - Criminal Justice Planning Agency 

- Department of Health 

- Wildlife and Marine Resources Department 

Washington - Department of Social and Health Services 

- State Hospital Commission 



Utah 



- Office of State Auditor 



I Local Government 
Alabama 
Arizona 

California 



Colorado 



Connecticut 
Florida 

Georgia 



- City of Sheffield 

- City of Mesa 

- Salt River Irrigation District 

- Bay Area Rapid Transit District 

- City of Los Angeles 

- County of Los Angeles 

- County of Santa Clara 

- Los Angeles Regional Transportation District 

- San Diego Comprehensive Planning Organization 

- San Diego Transit Corporation 

- San Francisco Department of Public Health 

- Southern California Rapid Transit District 

- Broadmoor Sanitation District 

- Denver Regional Transportation District 

- Platte River Power Authority 

- Pueblo Project Outlook Metropolitan District 

- Town of Columbine Valley 

- Winter Park West Water and Sanitation District 

- Hartford Regional Transportation District 

- City of Bartow 

- Orlando Central Business District 

- Tampa Bay Area Rapid Transit Authority 

- Town of Redington Shores 

- Central Atlanta Progress, Inc. 

- Metropolitan Atlanta Rapid Transit Authority 



228 



EXHIBIT 3 
Page A of 6 



LISTING OF DEPARTMENTS, AGENCIES OR SUBDIVISIONS OF UNITED STATES 

FEDERAL, STATE OR LOCAL GOVERNMENTAL AUTHORITIES 

FOR WHICH ARTHUR ANDERSEN & CO. PERFORMED SERVICES 

DURING THE FISCAL YEAR ENDED AUGUST 31, 197$ 



Local Government (continued) 

Illinois - Calumet Skyway Toll Bridge 

- Chicago Board of Education 

- Chicago Regional Transportation District 

- Chicago Transit Authority 

- Chicago Urban Transportation District 

- City of Burbank 

- City of Chicago 

- City of Peoria 

- Deerfield Bannockburn Fire Protection District 

- Lake County Public Water District 

- Mayor's Office of Manpower 

- Village of Riverwoods 

- Village of Streamwood 

- West Suburban Mass Transit District 

Indiana - Indiana Transit Authority 

- Indianapolis Community Services Council 

- Indianapolis Department of Administration 

- Indianapolis Department of Parks 

- Indianapolis Department of Public Safety 

- Knox County Hospital Association 

- Warren Township Assessor 

Maryland - Anne Arundel County 

- Board of Education of Washington County 

- Prince Georges Board of Education 

- Prince Georges Board of Health 

Massachusetts - Boston Regional Transportation District 

- City of Boston 

- Massachusetts Bay Transportation Authority 

- Southeastern Regional Transit Authority 

Michigan - City of Detroit 

- City of Detroit - Finance Department 

- City of Grand Rapids 

- City of Highland Park 

- Detroit Board of Education 

- Detroit Community Development Commission 

- Detroit Controller's Office 

- Detroit Health Service 

- Detroit Police Department 

- Muskegon County 

- Oakland City Drainage District 

- Wayne County Stadium Authority 



229 



EXHIBIT 3 
Page 5 of 6 

LISTING OF DEPARTMENTS, AGENCIES OR SUBDIVISIONS OF UNITED STATES 
FEDERAL, STATE OR LOCAL GOVERNMENTAL AUTHORITIES 
FOR WHICH ARTHUR ANDERSEN & CO. PERFORMED SERVICES 
DURING THE FISCAL YEAR ENDED AUGUST 31, 197$ 

Local Government (continued) 

Minnesota - Association of School Administrators 

- Hennepin County 

- Hennepin County Park Reserve District 

- Seaway Port Authority of Duluth 

- Town of White-Bear 

- Township of Stillwater 

Missouri - City of Des Peres 

- City of Springfield 

- Greater Kansas City Foreign Trade Zone 

- Jackson County Sports Complex Authority 

- Kansas City Area Transit Authority 

- Model Cities Comprehensive Neighborhood Health Center 

- Regional Justice Information System 

- St. Louis Metropolitan Airport Authority 

New Jersey - Borough of Ho-Ho-Koo 

New York - Batavia Housing Authority 

- Fund for the City of New York 

- Model Cities Administration - Fire "Department 

- Model Cities Administration - Police Department 

- Model Cities Administration - Sanitation Department 

- Model Cities Administration - Youth Services 

Administration 

- New York City Addiction Services Agency 

- New York City Transit Authority 

- New York State Moreland Act Commission 

- Rochester Housing Authority 

- Town of Perington 

Ohio - City of Cincinnati 

- City of Loveland 

- Cleveland Central Collection Agency 

- Cleveland Regional Income Tax Agency 

- Criminal Justice Coordinating Council of 

Greater Cleveland 

- Ohio-Kentucky-Indiana Regional Planning Authority 

- Queen City Metropolitan Transit Authority 

- Sheriff of Cuyahoga County 

Oklahoma - City of Tulsa 

- Oklahoma City Development Trust 

- Tulsa Metropolitan Ministry 



230 



EXHIBIT 3 

Page 6 of 6 

LISTING OF DEPARTMENTS, AGENCIES OR SUBDIVISIONS OF UNITED STATES 
FEDERAL, STATE OR LOCAL GOVERNMENTAL AUTHORITIES 
FOR WHICH ARTHUR ANDERSEN 4 CO. PERFORMED SERVICES 
DURING THE FISCAL YEAR ENDED AUGUST 31, 1975 

Local Government (continued) 

Pennsylvania - City of Philadelphia 

South Carolina - City of Charlotte 

Tennessee - Chattanooga Regional Transit Authority 

Texas - City of Houston 

- Dallas Water Utility Department 

- Harris County Child Welfare Unit 

- Polk County 

- Town of West over Hills 

Virginia - City of Rockville 

- Fairfax-Falls Church Community Mental Health and 

Mental Retardation Board 

- North Virginia Planning District Commission 

Washington - King County Courthouse 

- Public Utility District of Chelan County 

V/isconsin - Racine County 

District of 

Columbia - Council of Urban Economics 

- D.C. Model Cities Economic Development Corporation 

- Interstate Conference of Employment Security Agencies 

- Model Cities Program 

- Northwest Settlement House 

- Office of Housing 

- Regional Transportation District 



231 



EXHIBIT 4 
Page 1 of 1 

UNITED STATES FEDERAL DEPARTMENTS, AGENCIES, SUBDIVISIONS OR AUTHORITIES 
FOR WHICH ARTHUR ANDERSEN & CO. PERFORMED SERVICES 
DURING THE FISCAL YEARS ENDED MARCH 31, 1971, 1972, 1973 AND 1974 
AND THE FIVE MONTHS ENDED AUGUST 31, 1974 



Five Months 
Fiscal Year Ended March 31, Ended 
1971 1972 1973 1974 Aug. 31, 1974 

Department of Commerce / XX 

Department of the Interior XXX X 

Department of Transportation XXX X 

Department of the Treasury XX X 

Department of the Navy X X 

Federal Home Loan Bank Board X X X X X 

Federal Home Loan 

Mortgage Corporation X X X X X 

Federal Judicial Center X X 

Federal Reserve System X X 

1 
Federal Savings and Loan 

I Insurance Corporation X 

General Accounting Office XX X 

i 
House of Representatives X 

National Aeronautics and 

Space Administration X X X X X 

National Railroad 

Passenger Corporation X X X X X 

i 
Office of Economic Opportunity X 

I 
Panama Canal Company X X X X X 

Selective Service Commission X 

St. Lawrence Seaway 

Development Corporation X 

U.S. Courts Administration X X 

(U.S. Price Commission XXX 



232 

Arthur Young 5. Company 



27 7 PARK AVENUE 
NEW YORK. N. Y. IOOI7 



February 20, 1976 



The Honorable Lee Metcalf 
Chairman, Subcommittee of Reports 

Accounting and Management 
United States Senate 
161 Russell Building 
Washington, D. C. 20510 

Dear Senator Metcalf: 

I am enclosing Arthur Young & Company's response to the 
Questionnaire accompanying your letter to me dated December 19, 
1975. 

Our records are not maintained in a manner which 
facilitates providing the information you have requested. 
However, we have made special analyses of detailed tabulations 
and records from sources within and outside the firm to ensure 
that the information provided is as complete as possible. We 
believe our answers are responsive to your questionnaire. 

Very truly yours, 
/ 



filliam S. Kanaga' v_J 



Enclosures 



233 



RESPONSES TO QUESTIONNAIRE 
OF 
US SENATE SUBCOMMITTEE ON REPORTS 
ACCOUNTING AND MANAGEMENT 



Arthur Young & Company 
February 1976 



1. Please state the number of offices which your firm maintains 
within the United States (If more than one partnership, 
corporation or other entity exists in the United States, 
please furnish all names and answer subsequent questions 
accordingly. ) 

Arthur Young Si Company (including Arthur Young 
&. Company Puerto Rico) maintains offices in 64 
cities in the United States. 



2. Please indicate the number of states, territories or 

possessions of the United States in which your firm main- 
tains an office or affiliated office. 

Offices are located in 35 states or territories 
including the Disti'ict of Columbia and Puerto 
Rico. 



3. Please state the number of cities outside the United States 
in which you firm maintains offices or has an affiliation. 

The firm maintains offices or has affiliated 
partnerships or representation agreements with 
firms with offices in approximately 150 cities 
outside of the United States. 



4. Please state the number of partners in your firm located 
in the United States (include only certified public 
accountants . ) 

The firm had 414 partners who are certified 
public accountants and were located in the 
United States at February 1, 1976. 



234 



5. Please state the number of principals located in your 

offices in the United States who are not certified public 
accountants . 

We believe the rank you refer to as "principal" 
is most nearly equivalent to our rank of "Director". 
The firm had 50 Directors in offices in the United 
States at February 1, 1976. 



Please state the total number of employees of your firm 
within the United States, excluding only partners and 
principals . 

The total average number of employees in the 
United States (excluding partners and directors) 
during the month of January 1976 was approxi- 
mately 4,800. 



Please indicate the approximate percentage of total reve- 
nues for services performed by your firm in the following 
categories: 

A. Auditing and accounting 

B. Tax service 

C. Management advisory services including executive 
recruitment , product analysis, marketing analysis, 
and plant layout. 

D. Actuarial services 

E. Services performed for Federal, State or local 
governments 

F. Other 

All of our services are classified as Auditing 
and Accounting, Tax or Management Advisory 
Services. During the fiscal year ended Sept- 
ember 30, 1975, the percentages of services 
were approximately as follows: 

Auditing and Accounting 69% 
Tax services 17% 

Management advisory services 14% 

We do not perform actuarial services. 

Our records do not separately accumulate data 
relating to services performed for Federal, 
State and local governments. For purposes of 
answering this questionnaire, we have, however, 
reviewed tabulations of billings to clients and, 
based on this review, we estimate that services 
for governments represented approximately 5 to 
10% of the total of above services. 



235 



Please state if your firm renders management or other 
advisory services in the following categories: 

A. Executive recruitment 

B. Marketing analysis 

C. Plant layout 

D. Product analysis 

E. Actuarial services 

F. Federal advisory committees 

Our firm renders services in executive recruitment. 
We have performed services in the areas of marketing 
analysis, product analysis and plant layout; however, 
our work in these areas represents an insignificant 
portion of our management advisory services and is 
normally limited to fact gathering or is incidental 
to our work in other areas such as cost accounting 
and management control systems. We do not perform 
actuarial services, nor do we serve on federal 
advisory committees. 



Please state the name and address of corporations listed 
on the New York Stock Exchange for which your firm is the 
independent auditor. 

(See attached Schedule A) 



10. Please state the name and address of corporations listed 
on the American Stock Exchange for which your firm is the 
independent auditor. 

(See attached Schedule B) 



11. Please state the number of other publicly-held corporations 
for which your firm is the independent auditor, and the 
number of privately held corporations for which your firm 
is the independent auditor. 

As of October 1975, the number of other publicly- 
held corporations (Those with securities registered 
with the Securities Exchange Commission (SEC) and 
subject to further reporting to the SEC which are 
not included in Schedules A or B) was approximately 
430. 

We maintain a comprehensive list of clients 
whose annual fees exceed $7,500. As of October 1975, 
that list included approximately 1,950 privately- 
held clients for which we perform audit services. 



67-159 O - 77 - 17 



236 



12. Please indicate the total number of partners, principals, 
and employees of your firm who are members of the American 
Institute of Certified Public Accountants. 

The number of partners, directors and employees 
in our firm who are members of the American 
Institute of Certified Public Accounts was 
approximately 2,140 at January 31, 1976. 

13. Please state if your firm has made financial contributions, 
directly or indirectly, to the Financial Accounting Standards 
Board. If so, please indicate the amount of contributions 
made annually to date. 

Our firm has made contributions to the Financial 
Accounting Standards Board, directly or through 
the Accounting Research Association, in the years 
ended December 31 as follows: 

1975 $350,000 

1974 200,000 

1973 200,000 

14. Please identify the departments, agencies or subdivisions 

of any federal, state, municipal or other government author- 
ity for which your firm performed any services during 1975. 

(See attached Schedule C) 

15. Please identify the federal departments, agencies, sub- 
divisions or authorities for which you firm has performed 
services during each year from January 1, 1970 through 
December 31, 1974. 

(See attached Schedule D) 

16. Please state your firm's annual gross revenue from services 
performed for Federal departments, agencies, subdivisions 
or authorities during each year from January 1, 1970 to 
December 31, 1975. 

Our services performed for Federal departments, 
agencies, subdivisions or authorities are, with 
minor exceptions, billed by our office in Washington, 
D.C. (located in Bethesda prior to 1971) and comprise 
virtually all of the revenues of that office in the 
years for which data is requested. Revenues for that 
office in the years ending December 31 were as follows 
(in 000's): 

1975 $4,650 

1974 4,010 

1973 2,960 

1972 1,320 

1971 270 

1970 430 



237 



17. Please state if your firm maintains a department, division 
or office for the procurement of Federal, State and local 
government contracts. If so, please indicate the name of 
the person(s) in charge of said department, division or 
office, and address of such office(s). 

All of our offices may perform services under 
Federal, State and local government contracts. 
In the following offices, services performed 
are predominantly under government contracts: 

Office Person In Charge 

Twin Towers, Capitol Hill John R. Nolan 

99 Washington Avenue 
Albany, New York 12210 

901 Vaughn Building Richard L. Brown 

807 Brazos Street 
Austin, Texas 78701 

100 Chestnut Street, Suite 200 David A. Tierno 
Suite 200 

Harrisburg, Penna. 17101 

555 Capitol Mall Ronald G. Witcosky 

Suite 1490 

Sacramento, Calif. 95814 

1025 Connecticut Avenue, N.W. William C. O'Malley 
Washington, D. C. 20036 



238 



Sclit 'du I c A 



AUDIT CLIENTS OF ARTHUR YOUNG & COMPANY WHOSE EQUITY SECURITIES 
WERE LISTED ON THE N.Y. STOCK EXCHANGE AS OF NOVKMRKIt .'!() , 1975 + 



Akzona , Incorporated 

Alabama Gas Corporation 

Alison Mortgage Investment Trust 

Allright Auto Parks, Inc. 

Amerada Hess Corporation 

American Airlines, Inc. 

American Distilling Company, The 

American Standard Inc. 

AMF, Incorporated 

Amtel . Inc . 

Areata National Corporation 

Aro Corporation, The 

Associated Spring Corporation 

Automation Industries, Inc. 

Avco Corporation 

Bally Manufacturing Corporation 

Cabot, Cabot & Forbes Land Trust 

Capital Cities Communications, Inc. 

Central Soya Company, Inc. 

Cessna Aircraft Company 

Chesebrough-Pond 's . Inc. 

Collins & Aikman Corporation 

Conrac Corporation 

Continental Oil Company 

Cooper Tire & Rubber Company 

Cornwall Equities, Ltd. 

Denny ' s, Inc- . 

UPF , Incorporated 

Electronic Data Systems Corporation 

Electronic Memories and Magnetics 
Corp. 



Asheville, N.C. 
Birmingham, Alabama 
Newport Beach, Calif 
llous ton , Texas 
New York, N.Y. 
New York, N.Y. 
New York, N.Y. 
New York, N.Y. 
White Plains, N.Y. 
Prov idence , R.I. 
Menlo Park, Calif. 
Bryan, Ohio 
Bristol , Conn . 
Los Angeles, Calif. 
Greenwich, Conn. 
Chicago, 111. 
Boston, Mass. 
New York, N.Y. 
Fort Wayne , Ind . 
Wichita , Kansas 
Greenwich, Conn. 
New York, N.Y. 
New York, N.Y. 
Stamford , Conn . 
Findlay, Ohio 
New York, N.Y. 
La Mi t-acln , Ca I if . 
llartsdale, N.Y. 
Dallas, Texas 

Los Angeles, Calif. 



239 



AUDIT CLIENTS 01-' ARTHUR YOUNG & COMPANY WHOSE KQUITY SECURITIES 
WERE LISTED ON THE N.Y. STOCK EXCHANGE AS OF NOVEMBER 30, 1975* 



-2- 



Empire District Electric Company 

Equitable Gas Company 

Esmark, Inc. 

Fedders Corporation 

Fieldcrest Mills, Inc. 

Financial Federation, Inc. 

Florida East Coast Railway Company 

Fluor Corporation 

Gas Service Company, The 

GCA Corporation 

General Cable Corporation 

General Instrument Corporation 

Giddings & Lewis, Inc. 

Handleman Company 

Hesston Corporation, Inc. 

Heublein , Inc. 

Houghton Mifflin Co. 

ICN Pharmaceuticals, Inc. 

Imperial Corporation of America 

INA Corporation 

INA Investment Securities, Inc. 

International Minerals & Chemical 
Corporat ion 

Interstate Brands Corporation 

Koppcrs Company, Inc. 

Lockheed Aircraft Corporation 

Ludlow Corporation 

McDonald 's Corpora I ion 

McGraw Hill , Inc. 

Madison Square Garden Corporation 

Marathon Manufacturing Co. 



Jo pi in, Mo. 
Pittsburgh, Pa. 
Chicago, 111. 
Edison, N.J. 
Eden, N.C. 
Los Angeles, Calif. 
St. Augustine, Fla . 
Los Angeles, Calif. 
Kansas City, Mo. 
Bedford . Mass . 
Greenwich, Conn. 
Newark, N.J. 
Fond Du Lac. Wis. 
Detroit, Mich. 
Heston, Kansas 
Farmington, Conn. 
Boston, Mass. 
Irvine , Calif . 
San Diego, Calif . 
Philadelphia, Pa. 
Philadelphia , Pa . 

Libertyville , 111. 
Kansas City, Mo. 
Pittsburgh, Pa. 
Bur bank, Calif. 
Need ham Heights, Mass 
Oak Brook, 111. 
New York, N.Y. 
New York , N.Y. 
Houston, Texas 



240 



AUDIT CLIENTS OF ARTHUR YOUNG & COMPANY WHOSE EQUITY SECURITIES 
WERE LISTED ON THE N.Y. STOCK EXCHANGE AS OF NOVEMBER 30, 1975* 



-3- 



MBPXL Corp. 

Menasco Manufacturing Company 

MGIC Investment Corporation 

Microdot , Inc . 

Mobil Oil Corporation 

Montana-Dakota Utilities Co. 

Norton Company 

OKC Company 

Overnite Transportation Company 

Owens-Illinois, Inc. 

Paine Webber, Incorporated 

PepsiCo, Inc. 

Petrolane, Incorporated 

Phillips Petroleum Company 

Pioneer Corporation 

PNB Mortgage & Realty Investors 

Pope & Talbot, Inc. 

PSA, Inc. 1 

Public Service Company of Colorado' 

Pullman, Incorporated 

RCA Corporation 

2 

Reserve Oil and Gas Company 

Richmond Corporation 

SCA Services, Inc. 

Seaboard World Airlines, Inc. 

Service Corporation International 

She'll er Globe Corporation 

Smith, A. 0., Corporation 

Sonesta International Hotels 
Corporation 



Plainview, Texas 
Burbank, Calif. 
Milwaukee, Wis. 
Greenwich, Conn. 
New York, N.Y. 
Bismarck, N. Dakota 
Worcester, Mass. 
Dallas , Texas 
Richmond , Va . 
Toledo, Ohio 
New York, N.Y. 
Purchase, N.Y. 
Long Beach, Calif. 
Bartlesville , Okla. 
Amarillo, Texas 
Melrose Park, Pa. 
Portland, Oregon 
San Diego, Calif. 
Denver , Colorado 
Chicago, 111. 
New York, N.Y. 
Los Angeles, Calif. 
Richmond, Va . 
Boston, Mass. 
Jamaica , N.Y. 
Houston, Texas 
Toledo, Ohio 
Milwaukee, Wis. 

Boston, Mass. 



241 



AUDIT CLIENTS OF ARTHUR YOUNG & COMPANY WHOSE HQUITY SECURITIES 

WERE LISTED ON THE N.Y. STOCK EXCHANGE AS OE NOVEMBER 30, 1975* 



-4 



Southern Natural Resources, Inc. 

Sparton Corporation 

Sperry Rand Corporation 

Sterling Precision Corporation 

Suburban Propane Gas Corporation 

Teleprompter Corporation 

Texas Instruments, Inc. 

Textron, Inc . 

Thiokol Corporation 

Todd Shipyards Corp. 

Transohio Financial Corporation 

Trinity Industries, Inc. 

Tyler Corp. 

UMC Industries, Inc. 

United Corporation, The 

United Telecommunications, Inc. 

Universal Leaf Tobacco Co., Inc. 

Veeder Industries, Inc. 

Walmart Stores, Inc. 

3 
Warner Communications, Inc. 

West Point-Pepperell , Inc. 

Western Pacific Industries, Inc. 

Williams Companies, Inc. 

Wrigley W., Jr. Company 

Wyly Corp. 



Birmingham, Alabama 
Jackson , Midi . 
New York, N.Y. 
West Palm Beach, Fla 
Whippany, N.J. 
New York, N.Y. 
Dallas, Texas 
Providence , R.I. 
Bristol, Pa. 
New York, N.Y. 
Columbus , Ohio 
Dallas, Texas 
Dallas, Texas 
New York, N.Y. 
New York, N.Y. 
Kansas City, Mo. 
Richmond, Va . 
Hartford, Conn. 
Bentonville, Ark. 
New York, N.Y. 
West Point, Ga . 
New York, N.Y. 
Tulsa, Okla. 
Chicago , 111 . 
Dallas, Texas 



242 



AUDIT CLIENTS OF ARTHUR YOUNG & COMPANY WHOSE EQUITY SECURITIES 
WERE LISTED ON THE N.Y. STOCK EXCHANGE AS OF NOVEMBER 30, 1975* 



5- 



FOOTNOTES 

*From Commerce Clearing House N.Y. Stock Exchange Guide, January 
1976 

1. Has Warrants Listed On American Stock Exchange. 

2. Also Listed On American Stock Exchange. 

3. Has Other Securities Listed on American Stock Exchange. 



January 27, 1976 



243 



Schedule I J 

AUDIT CLIENTS OF ARTHUR YOUNG & COMPANY WHOSE EQUITY SECURITIES 
WERE LISTED ON THE AMERICAN STOCK EXCHANGE AS OF NOVEMBER 28, 1975* 



Alan Wood Steel Company 



1,2 



Amerada Hess Corporation 

Arrow Electronics, Inc. 

Avondale Mills 

Badger Meter, Inc. 

3 
Bannister Continetal Corp. 

Basin Petroleum Corp. 

Bertea Corporation 

Beverly Enterprises 

Bluebird Incorporated 

Burgess Industries, Incorporated 

Certified Corp. 

Coffee Mat Corporation 

Cohu, Inc. 

Commerce Group Corp. 

Computer Investors Group, Inc. 

Condec Corporation 

Corenco Corporation 

Cosco, Inc. 

Crutcher Resources Corporation 

Data Products Corporation 

Eason Oil Company 

Edgington Oil Company 

Electronic Engineering Company 
of California 

Ernst , E.C. , Inc. 

Fanny Farmer Candy Shops, Inc. 

FDI, Inc. 

First Realty Investment Corp. 

Firstmark Corporation 

Fischer & Porter Company 

Florida Rock Industries, Inc. 

Genge, Inc. 



Consiiohocken , Pa. 
New York, N.Y. 
New York, N.Y. 
Sylacauga, Alabama 
Milwaukee, Wis. 
Mississauga, Ontario, Can 
Oklahoma City, Okla. 
Irvine, Calif. 
Pasadena , Calif . 
Chicago, 111. 
Dallas, Texas 
Plainville, Mass. 
Kenilworth, N.J. 
San Diego, Calif. 
Milwaukee , Wis . 
Stamford, Conn. 
Old Greenwich, Conn. 
Tewksbury, Mass. 
Columbus, Ind. 
Houston, Texas 
Woodland Hills, Calif. 
Oklahoma City, Okla. 
Long Beach, Calif. 

Santa Ana , Calif . 
Washington, D.C. 
Bedford, Mass. 
Cleveland, Ohio 
Miami Beach, Fla . 
Buffalo, N.Y. 
Warminster , Pa . 
Jacksonville, Fla. 
Los Angeles, Calif. 



244 



AUDIT CLIENTS OI 1 ' ARTHUR YOUNG & COMPANY WHOSE KQUITY SECURITIES 

WERE LISTED ON THE AMERICAN STOCK EXCHANGE AS OF NOVEMBER 28, 1975* 



-2- 



Genisco Technology Corp. 

GRI Corp. 

Hemdale Enterprises, Inc. 

Huntington Health Services, Inc. 

Hycel, Inc. 

Indian Head, Inc. 

Instron Corporation 

International Systems and Controls 
Corporat ion 

Kay Corporation 

Lee National Corp. 

Lodge & Shipley Company, The 

LSB Industries, Inc. 

Mansfield Tire and Rubber Company 

Marshall Foods, Inc. 

McCulloch Oil Corp. 

Media General, Inc. 

MEM Company, Inc. 

Mercantile Industries, Inc. 

Midland Glass Co. 

Mission Investment Trust 

3 
Mouldings, Inc. 

3 
National Bellas Hess, Inc. 

National Health Enterprises, Inc. 

National Kinney Corp. 

New Park Resources 

Offshore Co. , The 

Palomar Financial 

Pep Boys - Manny, Moe & Jack, The 

1 2 
PNB Mortgage and Realty Investors ' 



Prel Corporation" 

Property 

PSA, Inc 



Property Capital Trust 
1,2 



Compton , Calif . 
Chicago, Illinois 
New York, N.Y. 
Los Angeles, Calif. 
Houston, Texas 
New York, N.Y. 
Canton, Mass. 

Houston, Texas 
Alexandria, Va . 
New York, N.Y. 
Cincinnati, Ohio 
Oklahoma City, Okla . 
Mansfield, Ohio 
Marshall , Minn . 
Los Angeles, Calif. 
Richmond, Va . 
Northvale, N.J. 
Chicago, 111. 
Cliffwood, N.J. 
San Diego, Calif. 
Las Vegas, Nevada 
North Kansas City, Mo 
Santa Monica, Calif. 

New York, N.Y. 
New Orleans , La . 
Houston, Texas 
San Diego, Calif. 
Philadelphia, Pa. 
Melrose Park, Pa. 
Saddle Brook, N.J. 
Boston, Mass. 
San Diego, Calif. 



245 



AUDIT CLIENTS OF ARTHUR YOUNG & COMPANY WHOSE lsQUITY SECURITIES 

WERE LISTED ON THE AMERICAN STOCK EXCHANGE AS OF NOVEMBER 28, 1975* 



Public Service Company of Colorado' 
Pulte Home Corporation 
Realty Income Trust 

Republic Housing Corp. 

2 

Reserve Oil and Gas Company 

Sealectro Corporation 
Southwest Airlines 

Stanley Aviation Corp. 

1 2 
Textron , Inc . ' 

Timpte Industries, Inc. 

Treadway Companies, Inc. 

United States Bancorp Realty and 
Mortgage Trust 

United States Filter Corporation 

Unitek Corporation 

Vikoa , Inc . 

2 
Warner Communications, Inc. 

Wat sco , Inc . 

Western Pacific Industries, Inc. 

Wolf, Howard B. , Inc. 

Wynn's International, Inc. 

Xonics, Inc. 



1,2 



Denver, Colo. 

West Bloomfield, Mich 

Providence, R.I. 

Dallas, Texas 

Apple Valley, Calif. 

Mama rone ck, N.Y. 

Dallas, Texas 

Denver , Colo . 

Providence , R.I. 

Denver , Colo . 

Pater son , N.J. 

Portland, Oregon 
New York, N.Y. 
Monrovia, Calif. 
New York, N.Y. 
New York, N.Y. 
Hialeah, Fla. 
New York, N.Y. 
Dallas , Texas 
Fullerton, Calif. 
Van Nuys, Calif. 



246 



AUDIT CLIENTS OV ARTHUR YOUNG ik COMPANY WHOSE HQUfTY SKCURITIES 

WERE LISTED ON THE AMERICAN STOCK EXCHANG E AS OF NOV EMI 3 E 1 l_ 2 8, 1975* 

-4- 



FOOTNOTES 

*Latest Listing Available From Commerce Clearing House 
American Stock Exchange Guide, January 1976 

1. Warrants are traded. 

2. Common shares traded on N.Y. Stock Exchange. 

3. Trading in common stock suspended. 



January 27, 1976 



247 



Sc hedule C 

DEPARTS VIS, V.r.sc w.S OR Pl/DIH VIS IOVS OF FEDFRM,, STATK \VP 'M'\r<~[p\[, \GEXCIES 

FOR WHICH ARTHUR YOUNG l - COMPANY PERI OHMI.I) SERVICES 

IN THE YEAR ENDING SEPTEMBER 30, 1975 

- 1 - 

Client Location Department, Agency, Subdivision Or Authorities 



State of Alaska Alaska Department of Administration 

Courts, Technical Service 
Department of Labor 
City of Anchorage Administration Department 

City of Cordova Audit Client 

City of Homer Audit Client 

Kenai Peninsula Borough Audit Client 

City of Kodiak Audit Client 

Matanuska Susikna School District Superintendent of Schools 

Audit Client 
Sf afe~5F _ Af Izoiia - " A"riz5na _ ~ __ fJavajo - EcouomIc "Oppof tilnlfy 

Department of Health Services 
County of Coconino County Courts 

Town of Benson Audit Client 

Lake Havasu Irrigation & Drainage District 

Sanitary District 
City of Phoenix Department of Health Services 

Public Library 
Scottsdale Public Schools Board of Education 

Sunnyside Public Schools Board of Education 

White Mountain Apache Tribe 

Town of Youngtown Audit Client 

Yuma Union High School District Board of Educacion 



248 



Schedule C 



DEP\RT\rrvrs, xgencies op. srcmvisiovs of rr.niim., state \vn MrvrriPAL agencies 
for which Anrnrn young i - company performed services 

IN THE YEAR ENDING SEPTEMBER 30, 1975 

- 2 - 



Client 



State of California 



County of Coachella Valley 
County of Contra Costa 
County of Humboldt 
County of Imperial 
County of Los Angeles 



County of Monterey 
County of Orange 

County of Plumas 
County of Riverside 

County of Sacramento 
County of San Joaquin 
County of Santa Barbara 

bounty of Santa Clara 

County of Trinity 

ABC Unified School District 

City of Anaheim 

City of Baldwin Park 

City of Beverly Hills 

Chaffey L'nion High School District 

City of Costa "esa 

City of Emeryville 

Federal National Mortgage Assoc. 

City of Fremont 

Garden Grove Unified School Dist. 

City of Gilroy 

Grossmont Union High School District 
City of Los Angeles 



Los Angeles Unified School District 

City of Martinez 

City of Sacramento 

City of San Die^-o 

San Diego Unified School District 

City of San Francisco 

City of San Jose 

San Jose Unified School District 
City of San Juan 
City of Stockton 



Location Department, Agency. Subdivision Or Authorities 

California Department of Water Resources 

Water Contractors Audit Committee 

Office of Criminal Justice Planning 

Judicial Council 

Health Department 

Employment Development Department 

Health & Welfare, Region VI 

Water District 

Director of Planning 

Department of Public Works 

Sheriff's Department 

Housing Authority 

Department of Commerce 

Administrative Office 

Personnel Department 

Transit District Planning Department 

Road Commission 

Narcotic Impact Team 

Road Department 

Community Health Department 

Department of Public Assistance 

Municipal Court 

Bureau of Alcoholism Service 

County Administration Office 

Police Department 

Office of the Superior Court 

Board of Education * 

Municipal Council (all departments) 

Police Department 

City Manager's Office 

Board of Education 

City Manager's Office (Data Proc . operations) 

Administration 

Police Department 

Dept. of Administrative Management Operations 

Department of Finance 

Audit Client 

Personnel Department 

Board of Parking Commissioners 

Fire Department 

City Clerk's Office 

Department of Water & Power 

Board of Commissioners 

Data Service Bureau 

Board of Education 

City Manager's Office 

Police Department 

School Board 

Personnel Operations 

Airport Improvement 

Police Department 
Controller's Office 
Audit Client 
Police Department 



249 



DEPARTMENT'S, AGENCIES OR SIBD IV IS IONS OF FEDERAL, STATE AND "VMCIPAL AGENCIES 

FOR MUCH AP.TIILR YOl'N'G 5c COMPANY PEP.FOP."ED SERVICES 

IN THE YEAR ENDING SEPTEMBER 30, 1975 



Client 



State of Connecticut 



City of Hartford 

City of New Britain 
Town of Southbridge 
City of Waterbury 



- 3 

Location 
Connecticut 



Department, Agency, Subdivision Or Authorities 

Committee on Training & Employment 

Statewide Enforcement Coordinating Committee 

State Police 

Welfare Department 

Housing Authority 

Comptroller's Office 

Housing Authority 

Town Manager's Office 

Comptroller's Office 



State of Colorado 

County of Denver 
City of Denver 



Colorado Department of Public Health 

Department of Social Services 

Department of Finance 

Department of Finance 



State of Delaware 
State of Florida 

NE Florida District No. 
County of Brevard 

County of Dade 
County of Lee 
County of Orange 
City of Canaveral 
City of Jacksonville 

City of Tampa 



City of_Titusville 

State of Georgia 
City of Atlanta 
City of East Point 

State of Hawaii 



Delaware 
Florida 



Courts Administrative Office 



Division of Fund Sales 

Auditor General 

Mental Health Board 

County Utility System 

County Clerk's Office 

Aviation Department 

County Administrator's Office 

Comptroller's Office 

Port Authority 

Public Health Division 

All Departments 

Office of the Mayor 

Audit Client 

Port Authority 

Audit Client 



Georgia 



Department of Human Resources 
Bureau of Management Services 
Housing Authority 



Hawaii 



County of Honolulu 

City of Honolulu 
State of Illinois 



County of St. Clair 
City of Chicago 



Department of Health 
Department of Budget & Finance 
Office of Human Resources 
Department of Public Works 
Department of Parks & Recreation 
Office of Human Resources 



City of Decatur 
City of Joliet 
City of Peoria 



Illinois Building Authority 

Housing Development Authority 
Bureau of Employment Security 
Auditor General's Office 
Department of General Services 
Department of Administration 
Public Building Commission 
Department of Public Works 
Housing Authority 
Beard of Health 
Vehicle Recycling Board 
Metropolitan Sanitary District 
Alcoholism Treatment Center 
Comptroller's Office * 
Housing Authority 
Housing Authority 
Housing Authority 
Police Department 



City of Gary 

City of Indianapolis 

City of South Bend 



Indiana 



Board of Education 
Controller's Office 
Housing Authority 
Housing Authority 



City of Excelsior Springs 
City of Kansas City 



Kansas 

Louisiana 

Maine 



City Clerk's Office 
Housing Authority 



City of New Orleans 



District Attorney 
Housing Authority 

Audit Client 



City of Portland 



250 



DEPARTMENTS. AGENCIES OR SUBDIVISIONS OF FEDERAL. ST\TE AND MUNICIPAL AGENCIES 

FOR WHICH ARTHUR YOUNG i: rO"PANT PERFORMED SERVICES 

IN THE YEAR ENDING SEPTEMBER 30, 1975 

- 4 - 



Client 



State of Massachusetts 
City of Boston 

City of Northboro 
State of Michigan 

County of Oakland 
City of Pontiac 

State of Minnesota 

County of Anoka 
State of Missouri 

County of Jackson 

County of St. Louis 
State of Montana 



Location 



Massachusetts 



Department, Agency, Subdivision Or Authoritie s 

Committee on Criminal Justice 
Housing Authority 

Office of Administrative Services 
Audit Client 



Michigan Department of Commerce 

Department of State Highways 
Road Commission 
Housing Commission 



Minnesota Supreme Court 

Department of Corrections 
Accounting Office 



Missouri State Auditor's Office 

Community Health Planning Office 
Court Administrator's Office 
Departnent of Revenue 
Audit Client 



Moc tana 
New Jersey 



Departnent of Health i Environmental Sciences 



State of New Jersey 
City 9£_Ca md en 

City of Buffalo 

City of New York 

City of Rockville Center 

County of Mecklenburg 

City of Winston Salem 
State of Ohio 

NE Ohio Coordinating Council 
County of Cuyahoga 

County of Lucas 

LLoyd County Development Co. 
City of Berea 
City of Canton 

City of Cuyahoga Metropolitan 
City of Cincinnati 

City of Columbus 
City of Toledo 



State Lottery Commission 
Housing Authority 

Audit Client 
Narcotic Courts 
Audit Client 



New York 



No. Carolina 



Human Resources 
Finance Department 
Audit Client 
Housing Authority 



Ohio 



Bureau of Employme 
Dept. of Health & 
Office of Administ 
Court of Common PI 
Juvenile Court 
Board of Commissio 
County Renewal Dep 
Audit Client 
Office of the Mayo 
Office of Public S 
Budget Office 
Housing Authority 
Board of Education 
Metropolitan Housi 
Department of Heal 
Economic Opportuni 



nt Services 
Mental Retardation 
ration 
eas 

ners 
artment 



r 
ervice 



ng Authority 

th 

ty Planning A=soc. 



Commonwealth Council of Central Okla. 
City of Bartlesville 
City of Oklahoma City 



Oklahoma Planning Office 
Audit Client 
Board of Education 
Police Department 



County of Multnomah 
City of Portland 



Oregon 
Pennsylvania 



Assessment ^ Tnxat 
Expos i t ion-Recrea t 



ion Division 
ion Commission 



State of Pennsylvania 



County of Fayet te-N'orth 
County of Westmoreland 
Borough of Chambersburg 
Township of Mt . Lebanon 
City of Pittsburgh 



Department of Justice 
Energy Council 
Public Utility Commission 
Public Parking Authority 
Municipal Authority 
Labor Relations Office 
Police Department 
Police Department 
Urban Redevelopmen 
Housing Authority 
Regional Personnel 
Executive Office 
Central Relocation 



t Authority 
Services Center 

Agencv 



251 



DEPARTMENTS, AGENCIES OR SUBDIVISIONS OF FEDERAL. STATE AND MUNICIPAL AGENCIES 

FOR WHICH ARTHUR YOUNG fc COVPANY PERFOP'TD SERVICES 

IN THE YEAR ENDING SEPTEMBER 30, 197 5 

- 5 - 



Client 



State of Rhode Island 



Location 



Rhode Island 



Department, Agency, Subdivision Or Authorities 



Public Utilities Commission 
Governor's Justice Council 
Court Component Committee 
Department of Economic Development 
Department of Health & Mental Retardation 



City of Greenville 
City of Greer 
City of Laurens 



So. Carolina 



Housing Authority 
Housing Authority 
Housing Authority 



State of Tennessee 
State of Texas 



Tennessee 
Texas 



LEAA 



North Texas Municipal Water District 

Southeast Texas Regional Planning Commission 

County of Harris 

County of Kaufman 

County of Tarrant 

County of Travis -Commissioners Court 

Alamo Area Council of Governments 

City of Dallas 



City of El Paso 
City of Fort Worth 

City of Garland 
City of Houston 



Nassau Bay Homes Assoc, 
City of Robstown 



Inc . 



Department of 
Education Age 
Audit Client 
Director of C 
Mental Health 
Municipal Uti 
Water Control 
County Judges 
Public Health 
Criminal Just 
Water Utiliti 
Police Depart 
Housing Autho 
Office of the 
Police Depart 
Board of Educ 
Police Depart 
Model Cities 
Management In 
Manpower Plan 
Audit Client 
Police Depart 



Public Welfare 
ncy 

riminal Justice 

& Mental Retardation 
lity District No. 1 

S: Improvement District No. 1 

Office 

ice Office 
es 

ment 
ri t ies 
Mayor 
ment 
at ion 
ment 



formation Services 
ning Division 

ment 



Commonwealth of Virginia 

City of Richmond 
State of Washington 



Virginia 



Office of the 
Office of the 
Governor's Mn 
Division of I 
Department of 
Richmond Area 



Controller 

Governor 
npo-ier Services Council 
ustice L Crime Prevention 

Justice 

"anoo*er Council 



County of King 
County of Yakima 

Federal Way School District 
City of Seattle 



Washington Board For Community College Education 
Commission for Vocational Education 
Department of Ecology 
Coordinating Council for Occupational 

Education 
Department of Motor Vehicles 
Department of Employee Security 
Department of Engineering 
Department of Social and Health Services 
Republican Caucus 
Courthouse Administrative Office 
County Courts 
Treasurer's Department 
Department of Human Resources 
Manamgenet Information Services 
Public Defender's Office 
General Services Departments 
Department of Parks & Recreation 
Department of Rudget fc Program Planning 



67-159 O - 77 - 18 



252 



Schedule C 



DEPARTMENTS, AGENCIES OR SUBDIVISIONS OF FEDERAL, STATE \NT> MUNICIPAL AGENCIES 
FOR WHICH ARTHUR YOUNG '- COMPANY PERFORMED SERVICES 

IN THE YEAR ENDING SEPTEMBER 30, 197 5 

- 6 - 



Client 



Location 



Department, Agency, Subdivision Or Authorities 



District of Columbia 
State of Wisconsin 



County of Brown 

County of Kenosh 

City of Madison Public School 

City of Milwaukee 



City of Wauwatosa 
City of West Allis 



Washington , DC Police Department 



Wisconsin Housing Authority 
Division of Aging 
Department of Administration 
Insurance Commissioner 
Housing Authority 
Director of Planning Si Research 
Board of Education 
Courts 

Sewage Commission 
Controller's Office 
Board of Education 
Board of Education 



Overseas Private Investment Corp. 
Federal Government 



New York 



Federal Audit Client 



Washington, DC HEW, Region IX 

Federal Energy Administration 

Environmental Protection Agency 

Railroad Administration 

OSHA 

Energy Research & Development 

National Academy of Science 

Health Planning & Resources Development 

HEW, Public Health Services, Region IX 

Bureau of Quality Assurance (DREW) 

NHTSA, DOT 

Teachers Corps 

National Oceanographic &; Atmospheric Admin. 

Health Services Administration 

Bureau of Community Health Services 

Social Security Administration 

House of Representat ires (HIS) 

Federal Highway Administration 

HUD, Office of Policy Development 

Department of Labor 

Assistant Secretary of Defense (Health & 

Environment) 
HEW, Alcohol, Drug Abuse Administration 
HEW, Social Rehabilitation Services 
ICC, Rail Planning Services Office 
HUD, Housing Management 
LEAA , Information Services 
HEW, Comprehensive Health Planning 
FDIC 

DOT, Transportation Safety Institute 
Environmental Research & Developmeot 

Administration 
Office of Education (DREW) 
Federal Railroad Administration 
National Institutes of Health (UHE'.v) 



253 



Sche dule 1) 

DEPARTMENTS, AGENCIES, SUBDIVISIONS OR AUTHORITIES 
FOR WHICH ARTHUR YOUNG & COMPANY PERFORMED SERVICES 
DURfNG EACH YEAR FROM JANUARY 1, 1970 THROUGH DECEMBER 31, 1974 



Year 1 


:s) 




1974 






1974 






1974 






1974 






1973, 


74 




1973, 


74 




1971 






1971 






1970, 


71 




1971 






1974 






1970, 


71 




1973, 


74 




1972, 


73 




1972 






1971, 


72, 


73 


1970, 


,71, 


72 


1972, 


,73, 


74 


1973, 


,74 




1973, 


,74 




1973, 


,74 




1973, 


,74 




1972, 


,73, 


,74 


1973 






1970 


,71, 


,72 


1974 






1973 


,74 




1973 






1970 


,71 




1972 







Client 



Environmental Protection Agency 
Federal Energy Administration 
Social & Rehabilitation Service, DHEW 
Federal Power Commission 
Department of Transportation 

Department of Agriculture 
Department of the Air Force 
Army Corps of Engineers 
Department of the Army 
Office of Management & Budget 

Department of Commerce 

Office of the Secretary of Defense 

Office of Education, DHEW 

The Office of the White House 

Federal Judicial Center 

Agency for International Development 

General Services Administration 

Department of Health, Education & Welfare 

Health Services & Mental Health Administration, DHEW 

Department of Housing & Urban Development 

Department of the Interior 

Department of Labor 

Law Enforcement Assistance Administration, DOJ 

U.S. Marine Corps 

National Bureau of Standards, DOC 

National Highway Traffic Safety Administration, DOT 

National Institutes of Health, DHEW 

National Park Service, DOI 

Department of the Navy 

Small Business Administration 



254 



COOPERS So LYBRAND 

125! Avenue or the Americas 
New York, N.Y.' 10020 



PHILIPL. DEFLIESE 
MANAGING PARTNER 



January 13, 1976 



Hon. Lee Metcalf, Chairman 
Subcommittee on Reports, 

Accounting and Management 
U. S. Senate 
l6l Russell Building 
Washington, D. C. 20510 

Dear Senator Metcalf: 



This is in response to your letter of 19 December 
1975 requesting the completion of a questionnaire regarding 
certain information and statistics relative to Coopers & 
Lybrand. 

Coopers & Lybrand respects the right of a 
Congressional committee, in the exercise of its responsi- 
bility, to obtain such information from the private sector 
as it may need to fulfill its legislative functions. The 
Firm intends to cooperate with your subcommittee and com- 
plete your questionnaire as soon as it can do so practicably 

Some of the information you request is of a nature 
that is not generally made public with respect to private 
professional firms. Consequently, we would like to request 
that the responses to your questionnaires remain confiden- 
tial with your staff. It would seem to us that appropriate 
summarizations without identifications should serve your 
subcommittee's purpose as well as any other. 

Some of the information requested is of a nature 
that is not ordinarily maintained on an ongoing basis at 
our national headquarters. Consequently, it will take some 
time for the data to be gathered from all our offices; 
however, we shall pursue the matter diligently. 

We would appreciate one clarification regarding 
the questionnaire. We note that questions 15 and 16, 
relating to the same class of services, are not consistent 
with respect to the period of time covered (i.e., 5 years 
vs. 6 years). Please advise whether this difference is 
intentional . 



255 



- 2 - 



Hon. Lee Metcalf 



January 13, 1976 



We assume that question 7 relates to the latest 
fiscal year of the Firm only. 



Very truly yours, 

J/ / ^ 

Philip L. Defl/ese 
Managing Partner 



PLDrdem 



256 



SAM NUNN, OA. LOWELL P. WEICKER, JR., 

, OHIO 



ABRAHAM RIB1COFF, CONN., CHAIRMAN SUBCOMMITTEE: 

JOHN L. MC CLELLAN, ARK. CHARLES H. PERCY, ILL. I FT METCALF, MONT., CHAIRMAN 

HENRY M. JACKSON, WASH. JACOB K. JAV1TS. N.Y. jO^-. , CLELLAN ARK ' mi I »=Ofir TTrww 

JAMES B. ALLEN, ALA, LOWELL P. WE1CKER, JR,, CONN. 

LAWTON CHILES, FLA. 

SAM NUNN, OA. VIC RE1 NEWER STAFF DIRECTOR 

JOHN GLENN, OHIO E. WINSLOW TURNER. CHIEF COUNSEL 

CHIEF CC^EL^NDSWF*SlRECTOR XjVTtttCO ^(E)XOAC& ^i>CtX-CtJ.C (202) 224- 1 474 

COMMITTEE ON 

GOVERNMENT OPERATIONS 

SUBCOMMITTEE ON REPORTS. 

ACCOUNTING. AND MANAGEMENT 

(PURSUANT TO SEC 7. S. RES. 963, NTH CONGRESS) 

WASHINGTON. O.C. 20910 



20 January 1976 



Mr. Philip L. Defliese ,, 

Managing Partner 

Coopers Q Lybrand 

1251 Avenue of the Americas 

New York, New York 11020 

Dear Mr. Defliese: 

Your letter of 13 January requests clarification of 
this subcommittee's questionnaire on accounting, as well 
as confidential treatment for some of the information in 
your firm's response. 

Question 7 refers to the latest fiscal year, however, 
similar data for each of the past five years would be of 
assistance to the subcommittee. Question IS does not 
request 1975 data because that information is covered by 
question 14. 

As a general policy, this subcommittee does not collect 
information for the confidential use of its members and 
staff. Information collected is of the type which should 
properly be in the public domain so that Congress and the 
public may be informed. The accounting questionnaire was 
specifically designed to avoid information which might 
be sensitive or affect the competitive standing of a firm. 

If your firm believes that some of the information is 
confidential, please indicate those sections on your 
response. While I cannot pledge confidentiality, I can 



257 



Mr. Philip L. Defliosc 
20 January 19 76 
Pago Two 

assure you that none of the designated infomation will be 
r.iade public without prior discussion with you or a repre- 
sentative of your firm whom you nay wish to designate for 
this purpose. 

Very truly yours, 



.ORIGIHAL SIGNED W 
LEE METCALF 



258 



COOPERS 80 LY BRAND 

1251 Avenue of the Americas 
New York, N.Y. 10020 



PHILIP L. DEFLIESE 
MANAGING PARTNER 



February 19, 19 76 



Hon. Lee Metcalf, Chairman 
Subcommittee on Reports , 

Accounting and Management 
U. S. Senate 
161 Russell Building 
Washington, D. C. 20510 

Dear Senator Metcalf: 



We are pleased to submit herewith the completed 
questionnaire in accordance with your request. 

In line with your suggestion, we have indicated 
those responses our Firm considers to be of a confidential 
nature and appreciate the assurance you have given us that 
none of this designated information will be made public 
without prior discussion with us. 



uly you£s, 



ese 





Philip 7 L. Defli 
Managing Partner 



PLD: emc 
Enclosure 



259 



Coopers & Lybrand 
Response to Questionnaire 

Submitted to 

Hon. Lee Metcalf , Chairman 

Subcommittee on 

Reports, Accounting & Management 

Committee on Government Operations 



February 19, 19 76 



260 



Coopers & Lybrand 
Responses to Questionnaire 

Question #1 

Number of Offices within United States: 81 

Question #2 

Number of states, territories, possessions of U.S. where 
Firm maintains Offices: 36 

Question #3 

Number of cities outside U.S. where Firm maintains Offices or 
has affiliations: 24 2 

Question #4 

Number of partners in Firm located in U.S. (certified public 
accountants only): 521 

Question #5 

Number of principals located in Offices in U.S. who are not 
certified public accountants: 44 

Question #6 Confidential 

Total number of employees of Firm within U.S., excluding 
partners and principals: 6, 189 

Question #7 Confidential 

Approximate percentage of total revenues for services performed 
in the following categories, Fiscal 1975: 

A. Auditing and Accounting 69.0% 

B. Tax Services 19.0 

C. Management Advisory Services 10.0 

D. Actuarial 2 .0 

100.0% 

E. Federal, State, and Local Govt. 2.0% 

(included in the above 4 areas 
of service) 

Question #8 

Categories in which Firm renders management or other advisory 
services: 

A. Executive Recruitment: Yes 

B. Marketing Analysis: Yes (Minimal) 

C. Plant Layout: Yes (Minimal) 

D. Product Analysis: No 

E. Actuarial Services: Yes 

F. Federal Advisory Committees: Yes 

At the present time, a member of 
our Firm, Mr. Frank Grey, 
Philadelphia, is serving as a 
member of the SEC Advisory 
Committee on Real Estate. 



261 



Question #9 

Corporations listed on New York Stock Exchange for which Firm is 
independent auditor: See List Attached 

Question #10 

Corporations listed on American Stock Exchange for which Firm is 
independent auditor: See List Attached 

Question #11 Confidential 

Number of other publicly held corporations for which Firm is 
independent auditor: 561 

Number of privately held corporations for which Firm is 
independent auditor: 4877 (excluding subsidiaries) 

7 382 (including subsidiaries of privately held corporations and 
Question #12 subsidiaries of publicly held companies not separately traded) 

Total number of partners, principals and employees who are 
members of American Institute of Certified Public Accountants: 
2,280 



Question #13 

Contributions to Financial Accounting Standards Board: 

The following payments were made to the Accounting Research 
Association to be passed on to the Financial Accounting 
Foundation to support the Financial Accounting Standards 
Board: 

Calendar Year Amount 

1972 $ 90,000 

1973 150,000 

1974 200,000 
19 75 200,000 
1976 (to date) 50,000 

Question #14 

Government agencies for whom Firm performed services during 19 75: 
See List Attached 

Question #15 

Federal entities for whom Firm performed services during calendar 
years 19 70 through 19 74: See List Attached 

Question #1 6 Confidential 

Annual gross revenues for services performed for federal entities 
during calendar years 19 70 through 19 75: See List Attached 

Question #17 

The Firm does not maintain a department, division or office for the 
procurement of Federal, State and local government contracts. 
However, we do have certain persons who are involved in responding 
to Government RFP's. 



262 



ANSWER TO QUESTION jf$ 



COOPERS AND LYBRAND CLIENTS 

LISTED ON 

NEW YORK STOCK EXCHANGE 



AMAX, Inc. 

ASARCO, Inc. 

Adams Express Co. 

Albany International Corp. 

Allen Group, Inc. 

Allied Maintenance Corp. 
Aluminum Company of America 
Amalgamated Sugar Co. 
American Brands, Inc. 
American Can Co. 

American Telephone and Telegraph 

Co. 
Armada Corp. 

Atico Mortgage Investors 
Atlantic Richfield Co. 
Atlas Corp. 

Baltimore Gas and Electric Co. 

Barber Oil Corp. 

Barnett Mortgage Trust 

Boston Edison Co. 

Brown & Sharpe Manufacturing Co. 

CBS, Inc. 

CCI Corporation 

CNA-Larwin Investment Company 

Cabot Corp. 

Callahan Mining Corp. 

Capital Mortgage Investments 
Carpenter Technology Corp. 
Carriers & General Corp. 
Central Louisiana Electric Company 
Chesapeake Corporation of Virginia 

Cincinnati Bell, Inc. 

Colonial Penn Group, Inc. 

ConAgra, Inc. 

Continental Copper & Steel Ind. , 

Inc . 
Copper Range Co. 

Crouse-Hinds Co. 
Crown Zellerbach Corp. 
Curtiss-Wright Corp. 
Cyprus Mines Corp. 
Damon Corp. 



New York, N.Y. 
New York, N.Y. 
New York, N.Y. 
Albany, N.Y. 
Melville, N.Y. 

New York, N.Y. 
Pittsburgh, Pa. 
Ogden, Utah 
New York, N.Y. 
Greenwich, Conn. 

New York, N.Y. 

Detroit, Mich. 
Miami, Fla. 
Los Angeles, Calif. 
New York, N.Y. 

Baltimore, Md. 

New York, N.Y. 

Jacksonville, Fla. 

Boston, Mass. 

North Kingstown, R.I. 

New York, N.Y. 
Tulsa, Okla. 
New York, N.Y. 
Boston, Mass. 
Darien, Conn. 

Chevy Chase, Md. 
Reading, Pa. 
New York, N.Y. 
Alexandria, La. 
West Point, Va . 

Cincinnati, Ohio 
Philadelphia, Pa. 
Omaha , Neb . 
New York, N.Y. 

White Pine, Mich. 

Syracuse, N.Y. 

San Francisco, Calif. 

Woodridge, N.J. 

Los Angeles, Calif. 

Needham Heights, Mass 



263 



C»Q| "-r:-. :iml I.ytn- m. l Cllcr l: Ht w fork fitouk Kxchnnflc (cent ltiuc-d ) 



Delmarva Power ft Light Co. 
Dexter Corp. 
Dictaphone Corp. 
Digital Equipment Corp. 
Diversified Industries, Inc. 

Dun & Bradstreet Companies, Inc. 

Duplan Corp. 

Emery Industries, Inc. 

Ethyl Corp. 

Fidelity Mortgage Investors 

Firestone Tire & Rubber Co. 
First National Boston Corp. 
Flintkote Co. 
Ford Motor Co. 
Freeport Minerals Co. 

Garfinkel, Brooks Bros., 
Miller & Rhoads , Inc. 
General Growth Properties 
General Public Utilities Corp. 
General Refractories Co. 
Genstar Ltd. 
Global Marine, Inc. 

Guardian Industries Corp. 
Gulf States Utilities Co. 
HMW Industries, Inc. 
Hammond Corp. 
Harsco Corp. 

Hecla Mining Co. 

Helene Curtis Industries, Inc. 

Hemisphere Fund, Inc. 

Hercules, Inc. 

High Voltage Engineering Corp. 

Horizon Corp. 

Humana, Inc. 

International Rectifier Corp. 

Interstate United Corp. 

Jersey Central Power & Light Co. 

Johns-Manville Corp. 

Johnson & Johnson 

Kennecott Copper Corp. 

Keystone Consolidated Industries, 

Inc . 
Kroger Co. 

Lane Bryant, Inc. 

Leeds & Northrup Co. 

Lehigh Valley Industries, Inc. 

Lone Star Industries, Inc. 

Loral Corp. 



Wilmington, Del. 
Windsor Locks, Conn, 
Rye, N.Y. 
Maynard , Mass. 
Clayton, Mo. 

New York, N.Y. 
Winston-Salem, N.C. 
Cincinnati, Ohio 
Richmond, Va. 
Jacksonville, Fla. 

Akron, Ohio 
Boston, Mass. 
White Plains, N.Y. 
Dearborn, Mich. 
New York, N.Y. 

Washington, D.C. 

Des Moines, Iowa 
New York, N.Y. 
Bala-Cynwyd, Pa. 
Montreal, Canada 
Los Angeles, Calif. 
Northville, Mich. 
Beaumont, Tex. 
Stamford, Conn. 
Chicago, 111. 
Camp Hill, Pa. 

Wallace, Idaho 
Chicago, 111. 
New York, N.Y. 
Wilmington, Del. 
Burlington, Mass. 

Tucson, Ariz. 
Louisville, Ky . 
Los Angeles, Calif. 
Chicago, 111. 
Morristown, N.J. 

Denver, Colo. 
New Brunswick, N.J. 
New York, N.Y. 
Peoria, 111. 

Cincinnati, Ohio 

New York, N.Y. 
North Wales, Pa. 
New York, N.Y. 
Greenwich, Conn. 
New York, N.Y. 



264 



^c opers nvi I vIt mhj Client : 



N'rw Vofk C\ cck l r xch 'ir;r ( cent. i nued ) 



Lynch Communication Systems , Inc . 

Mac Andrews & Forbes Co. 
Madison Fund, Inc. 
Manhattan Industries, Inc. 
Martin Marietta Aluminum, Inc. 

Maryland Cup Corp. 

Masco Corp. 

Mass. Mutual Corporate Investors 

Inc . 
Mass. Mutual Income Investors, 

Inc . 
Mass. Mutual Mortgage and Realty 

Investors 



San Francisco, Calif, 
Philadelphia, Pa. 
Wilmington, Del. 
New York, N.Y. 
Washington, D.C. 

Owings Mills, Md . 
Taylor, Mich. 
Springfield, Mass. 

Springfield, Mass. 

Springfield, Mass. 



Metropolitan Edison Company 
Mid-Continent Telephone Corp. 
Milton Bradley Co. 
Minnesota Mining and Manu- 
facturing 
Mission Equities Corp. 

Monarch Machine Tool Co. 
Morrison-Knudsen Company, Inc. 
Mountain States Telephone and 

Tel. Co. 
Murphy Co. , G.C. 
N.L. Industries, Inc. 

Nabisco, Inc. 

National Presto Industries , Inc . 

New England Electric System 

New England Mutual Life Insurance 
Co. 

New England Telephone and Tele- 
graph Co. 

New York State Electric & Gas 

Corp. 
Oakite Products, Inc. 
Orange Co . , Inc . 

Pacific Telephone & Telegraph Co. 
Pacific Tin Consolidated Corp. 

Pan American World Airways, Inc. 
Parker-Hannif in Corp. 
Petroleum Corporation of America 
Philadelphia Electric Co. 
Philip Morris, Inc. 

Planning Research Corp. 
Playboy Enterprises, Inc. 
Proler International Corp. 
Puget Sound Power & Light Co. 
Quaker State Oil Refining Corp. 



Reading, Pa. 
Hudson, Ohio 
Springfield, Mass. 
St. Paul, Minn. 

Los Angeles, Calif, 

Sidney, Ohio 
Boise, Idaho 
Denver, Colo. 

McKeesport, Pa. 
New York, N.Y. 

New York, N.Y. 
Eau Claire, Wis. 
Westborough, Mass. 
Boston, Mass. 

Boston, Mass. 



Ithaca, N.Y. 

Berkeley Heights, N.J 
Columbus, Ohio 
San Francisco, Calif.. 
New York, N.Y. 

New York, N.Y. 
Cleveland, Ohio 
New York, N.Y. 
Philadelphia, Pa. 
New York, N.Y. 

Los Angeles, Calif. 
Chicago, 111. 
Houston, Tex. 
Bellevue, Wash. 
Oil City, Pa. 



265 



Coci 'IT. tikI l.yl r nil 0) I «--nt r, 



How York 

, Tnc . 



_fll f'fl ! ■'•/..? i) n -,.-/■ (continued J 



Ram.ida Inn: 

Ranco, Inc. 

Raytheon Co. 

Reading & Dates Offshore 

Drilling Co. 
Revere Copper and Brass, Inc. 

Rorer-Amchem, Inc. 

Royal Crown Cola Co. 

Savannah Electric and Power Co. 

Savin Business Machines Corp. 

Scoa Industries, Inc. 

Scott & Petzer Co. 
Scudder Duo-Vest, Inc. 
Sierra Pacific Power Co. 
Simmons Co. 
Skyline Corp. 

Southern New England Telephone Co. 
Sterndent Corp. 
Stokely-Van Camp, Inc. 
Stone & Webster, Inc. 
Storer Broadcasting Co. 

Stride Rite Corp. 

Sun Oil Co. 

Sunshine Mining Co. 

Swank, Inc. 

Talcott National Corp. 

Talley Industries, Inc. 

Tampa Electric Co. 

Telex Corp. 

Transway International Corp. 

Travelers Corp. 

UGI Corp. 

USM Corp. 

UV Industries, Inc. 

Union Corp. 

Union Oil Company of California 

United Illuminating Co. 
United Refining Co. 
United States Fidelity and 

Guaranty Co. 
Unitrode Corp. 
Upjohn Co. 

Varian Associates 

Viacom International, Inc. 

Virginia Electric and Power Co. 

Washington Steel Corp. 

Weis Markets, Inc. 

Western Publishing Company, Inc. 

Whittaker Corp. 

Wickes Corp. 

World Airways, Inc. 

Zayre Corp. 



Phoenix, Ariz. 
Columbus, Ohio 
Lexington, Mass. 
Tulsa, Okla. 

New York, N.Y. 

Fort Washington, Pa 
Atlanta, Ca. 
Savannah, 0a. 
Valhalla, N.Y. 
Columbus, Ohio 

Lakewood, Ohio 
New York, N.Y. 
Reno, Nev. 
Atlanta, Ga. 
Elkhart, Ind. 

New Haven, Conn. 
Mt. Vernon, N.Y. 
Indianapolis, Inc. 
New York, N.Y. 
Miami Beach, Fla. 

Boston, Mass. 
St. Davids, Pa. 
Kellogg, Idaho 
Attleboro, Mass. 
New York, N.Y. 

Mesa, Ariz. 
Tampa, Fla. 
Tulsa, Okla. 
New York, N.Y. 
Hartford, Conn. 

Valley Forge, Pa. 

Boston, Mass. 

New York, N.Y. 

Verona, Pa. 

Los Angeles, Calif. 

New Haven, Conn. 
Warren, Pa. 
Baltimore, Md . 

Watertown, Mass. 
Kalamazoo, Mich. 

Palo Alto, Calif. 
New York, N.Y. 
Richmond, Va . 
Washington, Pa. 
Sunbury, Pa. 

Racine, Wis. 
Lor. Angeles, Calif. 
San Diego, Calif. 
Oakland, Calif. 

Framingham, Mass. 



266 



ANSWER TO QUESTION #10 



COOPERS AND LYBRAMD CLIENTS 

LISTED ON 

AMERICAN STOCK EXCHANGE 



AVX Corp. 

Airpax Electronics, Inc. 

Alcolac, Inc. 

Amco Industries, Inc. 

American International Pictures 

American Maize-Products Co. 
American Realty Trust 
Anixter Bros., Inc. 
Baldwin Securities Corp. 
Bancroft Convertible Fund, Inc. 

Binney & Smith, Inc. 

Blount , Inc . 

Bolt Beranek and Newman, Inc. 

Brown-Forman Distillers Corp. 

CSE Corp. 



Great Neck, N.Y. 
Fort Lauderdale, Fla. 
Baltimore, Md. 
Franklin Park, 111. 
Beverly Hill, Calif. 

New York, N.Y. 
Arlington, Va . 
Skokie, 111. 
New York, N.Y. 
New York, N.Y. 

New York, N.Y. 
Montgomery, Ala. 
Cambridge, Mass. 
Louisville, Ky . 
San Francisco, Calif, 



Campbell Industries 
Caressa, Inc. 
Carrols Development Corp. 
Chemical Express Co. 
Citizens Financial Corp. 

Coit International, Inc. 
Combustion Equipment Associates, 

Inc . 
Compudyne Corp. 
Conrock Co. 
Consolidated Oil & Gas, Inc. 

Continental Materials Corp. 

Corroon & Black Corp. 

Curtis Mathes Corp. 

DCL, Inc. 

Data-Control Systems, Inc. 

ELT, Inc. 

Earth Resources Co. 

Eastern Co. 

Egan Machinery Co. 

First Connecticut Small Business 

Flying Diamond Oil Corp. 
Fresnillo Co. 
Gilbert Companies, Inc. 
Glenmore Distilleries Co. 
Grand Central, Inc. 



San Diego, Calif. 
Miami, Fla. 
Syracuse, N.Y. 
Dallas, Tex. 
Cleveland, Ohio 

Dallas, Tex. 
New York, N.Y. 

Chicago, 111. 

Los Angeles, Calif. 

Denver, Colo. 

Chicago, 111. 
New York, N.Y. 
Athens, Tex. 
Englewood, N.J. 
Danbury, Conn. 

Cherry Hill, N.J. 
Dallas, Tex. 
Westwood, Mass. 
Somerville, M.J. 
Bridgeport, Conn. 

Denver, Col. 
New York, N.Y. 
Columbus, Ohio 
Louisville, Ky. 
Salt Lake City, Utah 



267 



C&L Cli ents - A merican r.tock Kxch m^e (continued ) 



Great American Industries, Inc. 
Great Lakes Recreation Co. 

Greit Realty Trust 
Gruen Industries, Inc. 
Heinickc Instruments Co. 

House of Vision, Inc. 
Inolex Corporation 
Investors Funding Corp. 
Ionics, Incorporated 
Jeannette Corp. 

Kit Manufacturing Co. 
Lane Wood, Inc. 

Latouraine-Bickford ' s Foods, Inc. 
Macrodyne Industries, Inc. 
Manhattan Life Corp. 

Maule Industries, Inc. 
Mil go Electronics Corp. 
Mite Corp. 
Moamco Corp. 
Nelly Don, Inc. 

New Hampshire Ball Bearings ,Inc . 
Newcor, Inc. 
On-Line Systems, Inc. 
Oxford First Corp. 
Pacific Northwest Bell Telephone 
Co. 



New York, H.Y. 
Southfield, Mich. 
Drexel Mill, Pa. 
New York, N.Y. 
Hollywood, Fla. 

Chicago, 111. 
Chicago, 111. 
New York, N.Y. 
Watertown, Mass. 
Jeannette, Pa. 

Long Beach, Calif. 
Dallas, Tex. 
Newton, Mass. 
Los Angeles, Calif. 
New York, N.Y. 

Miami, Fla. 

Miami, Fla. 

New Haven, Conn. 

Minneapolis, Minn. 

North Kansas City, Mo 

Peterborough, N.H. 
Bay City, Mich. 
Pittsburgh, Pa. 
Philadelphia, Pa. 
Seattle, Wash. 



Pandel-Bradford, Inc. 
Pratt-Read Corp. 
Punta Gorda Isles, Inc. 
Putnam's Sons, G.P. 
Research-Cottrell, Inc. 

Rex-Noreco, Inc. 
Rio Algom Mines Ltd. 
Rockwood National Corp. 
Rogers Corp. 
Ryan Homes, Inc. 

SGL Industries, Inc. 
Saunders Leasing Syster, Inc. 
Scope Industries 
Seligman & Associates, Inc. 
Shearson Hayden Stone, Inc. 

Splentex, Inc. 

Stelber Industries, Inc. 

Systems Engineering Laboratories, 

Inc . 
TFI Industries, Inc. 
Tasty Baking Co. 



Lowell, Mass. 
Ivoryton, Conn. 
Punta Gorda, Fla. 
New York, N.Y. 
Bound Brook, N.J. 

Englewood Cliffs, N.J 
Ontario, Toronto 
Elmsford, N.Y. 
Rogers, Conn. 
Pittsburgh, Pa. 

Haddonfield, N.J. 
Birmingham, Ala. 
Los Angeles, Calif. 
Southfield, Mich. 
New York, N.Y. 

New York, N.Y. 
Valley Stream, N.Y. 
Fort Lauderdale, Fla. 

Chicago, 111. 
Philadelphia, Pa. 



67-159 O - 77 - 19 



268 



C'L C 1 rtilv. - Anur.tc-in Clo cV K xrli -'ingp (conlinunl ) 



Telecom Corp. 

Teradync, Inc. 

Tokheim Corp. 

Turner Construction Co. 

U.S. Natural Resources, Inc 



Houston, Tex. 
Boston, Mass. 
Fort Wayne, Ind. 
New York, N.Y. 
Menlo Park, Calif. 



United Aircraft Products, Inc. 
Wagner Electric Corp. 
Welded Tube Company of America 
Worcester Controls Corp. 
Wyomissing Corp. 



Dayton, Ohio 
Parsippany, N.J. 
Philadelphia, Pa. 
West Boylston, Mass 
West Reading, Pa. 



269 



ANSWER TO QUESTION #14 



GOVERNMENT AGENCIES FOR WHOM 
SERVICES WERE PERFORMED 
DURING 1975 



I. FEDERAL ENTITIES 



Army Armaments Command 

Bureau of Mines, Interior 

Bureau of Quality Assurance , HEW 

Drug Enforcement Agency 

Federal Aviation Administration 

Federal Home Loan Bank Board 

Federal Reserve Bank 

Bouse of Representatives, Office of Information Systems 

Housing and Urban Development, Department of 

Interstate Commerce Commission 

Law Enforcement Assistance Administration 

National Institute of Health 

Navy, Department of 

Office of the Secretary of Defense 

Postal Service 

Social and Rehabilitation Service, HEW 

Smithsonian Institution 



270 



QUESTION #14 ( continued ) 



- 2 - 



II. STATE ENTITIES 



Alabama 
Alaska 



California 



Colorado 
Florida 
Georgia 
Gulf States 
Hawaii 



Indiana 



ABC Board 

Legislative Council 

Native Foundation 

Native Fund 

Community College District, Los Rios 

Employee Contingency Reserve Fund 

Old Age and Survivors Insurance Fund 

Legislators Retirement Fund 

Public Buildings Construction Fund 

Exposition Revenue Bonds 

Rapid Transit District, Southern California 

Teachers Retirement System 

Public Employees Retirement System 

Rousing Finance Authority 

Department of Transportation 

Residential Finance Agency 

Marine Fisheries Commission 

Department of Agriculture 

Department of Transportation 

Legal Aid Society 

Special Compensation Fund 

Senate 



271 



QUESTION #14 (continued) 



- 3 - 



Kentucky 



Louisiana 



Maine 
Maryland 



Massachusetts - 



Michigan 
Minnesota 



Missouri 



Department of Highways 

Pollution Abatement Authority 

Information Processing Agency 

Health and Human Resource Administration 

Housing Finance Authority 

State of 

Community Development Administration 

Department of Budget and Fiscal Planning 

Department of Fiscal Services 

Department of Education 

Department of Employment and Social Services 

Department of Transportation 

Department of Vocational Rehabilitation 

General Assembly Pension Study Committee 

Housing Fund 

Industrial Development Authority 

Department of Human Resources 

Port Authority 

Rehabilitation Commission 

Housing and Finance Authority 

Workers Compensation Agency 

Housing Finance Agency 

Higher Education Facilities Authority 

Higher Education Coordination Commission 

State Auditor 

Housing Development Commission 

Bi-State Development Agency 



272 



QUESTION #14 (continued) 



-' 4 - 



New Jersey 
New York 



Ohio 

Oklahoma 
Oregon 
Puerto Rico 

South Dakota 
Texas 

Vermont 
Virginia 

Washington 



Health Maintenance Organization 

Bealth Research , Inc. 

Roswell Park Bousing Authority 

Legislative Bill Drafting Committee 

Department of Public Welfare 

Housing Development Board 

Bousing Finance Authority 

Filbert Control Board 

Data Processing Agency 

Youth Action Administration 

Housing Development Authority 

Advisory Commission on Intergovernmental 

Relations 

Insurance Department 

Housing Development Authority 

Ports Authority 

Department of Fisheries 

Legislature 

School Bus System 

State College, Eastern Washington 

Community College District 



University of Alaska 

University of California Medical Center 

University of Badlands, California 

University of Hawaii 

University of Idaho 

University of Kentucky 

University of Massachusetts 

University of Vermont 

University of Washington 



273 



QUESTION #14 (continued) - 5 - 

~IX, LOCAL ENTITIES 

Abington School District Authority, Pa. 

Acalanes Union High School District , Calif. 

Acme Improvement District, West Palm Beach, Fla, 

Alameda County, Calif. 

Allen County, Ind. Economic Opportunity Council 

American Museum of Natural History, NY. 

Amity Township Police Pension Fund, Pa. 

Anchorage, Alas. 

Anne Arundel County, Md. 

Arnold, Mo. 

Avon Township, Mich. 



Baldwins ville, NY Central School District 
Bangor, Me. Airport 

Barrett Township, Pa. Police Pension Pund 
Barrow, Alas. 

Bay State Professional Services Review Organization, Mass 
Bel-Aire Col. Sanitation District 
Bellaire, Tex. 
Ben6alem School District 
Bering Straits Native Corp. Alas. 
'Berrien County, Mich. Building Authority 
Berrien County, Mich. Road Commission 



274 



QUESTION #14 (continued) - 6 - 



Binghamton, NY General Hospital 

Binghamton, NY Model Cities Program 

Birmingham, Ala. 

Birmingham, Mich. 

Bloomfield Bills, Mich. School District 

Boca Raton, PI. 

Boston, Mass. 

Boyd County, Ky. 

Bridgman, Mich. (City and Water Supply System) 

Broward County, PI. 

Broward County, PI. Manpower Council 

Buchanan Township, Mich. 

Buffalo County, Neb. 

Byron, Ga. 



Campbell County, Va. Schools 

Campbell, Ca. 

Carl ton , Or . 

Carthage, NY Area Hospital 

Cascade Locks, Or. (City and Urban Renewal Agency) 

Cass County, Mich. Road Commission 

Central New York Regional Transportation Authority 

Central Ohio Transit Authority 



275 

QUESTION #14 (continued) - 7 - 



Charlotte, NC OBO Grant 

Charlotte and Mecklenburg County , NC Hospital Authority 

Charlotte and Mecklenburg County, NC Public Library 

Char tiers, Pa. Sanitary Authority 

Chester Housing Authority, Pa. 

Cincinnati Council on Aging 

Cincinnati Model Cities Agency 

City of Industry, Los Angeles 

Civic Improvement Corp. Phoenix, Ariz. 

Civic Plaza Building Corp. Phoenix, Ariz. 

Clackamas County, Or. (City, CAA and Service District) 

Cleveland, Oh. Criminal Justice Coordinating Council 

Columbia, Or. Regional Association of Governments 

Columbus, Oh. Legal Services Corporation 

Columbus, Oh. Model Cities Agency 

Columbus, Oh. Revenue Sharing Agencies 

Community Fire Protection District, St. Louis County, Mo. 

Concord, Ind. School Township Building 

Corbett, Or. School District 

Cordova, Ala. 

Corning, NY School District 

Corvallis, Or* School District 

Cranberry, Pa. Municipal Sewer and Water Authority 

Culpeper, Va. 

Culpeper County, Va. Schools 



276 



QUESTION #14 (continued) - 8 - 



Dade County , Fl. School District 

Darien, Conn. 

Dayton, Oh. Joint Township Hospital 

Delaware County, Pa. Community College 

Detroit, Mich. Housing Authority 

Detroit-Wayne Joint Building Authority, Mich. 

Dillingham School District, Alas. 

Douglas County, Neb. 

DuPage County, 111. 

Durham, Or. 



Bast Bay Regional Park District, Calif. 

Bast Pennsylvania Nursing Home 

E. C. Glass High School Funds, Lynchburg, Va. 

Bdwardsburg, Mich. Public Schools 

Blkhart, Znd. High School Building Corp. 

Elk Grove, Calif. Unified School District 

Elk ton, Or. 

Blmira Heights, NY School District 

Eugene, Or. (City and water and Electric Board) 

Everett, Ma. 



Fairfax County, Va. 

Fannin County, Ga. Hospital 

Fauquier County, Va* Hospital 



277 



QUESTION #14 (continued) - 9 



Flagstaff, Ariz. Housing Authority 

Flint, Mich. 

Florida Keys Aqueduct Authority 

Florissant , Mo. 

Fort Wayne, Znd. Legal Services Program 

Fr amingham , Mas 8 • 

Fulton County, Pa. Medical Center 



Gresham, Or. 

Grosse Point Farms, Mich. 

Grosse Point Park, Mich. 

Grosse Point Woods, Mich. 

Guadalupe Valley, Calif. Improvement District 



Hamilton, NY Memorial Hospital 

Hampton, Va. 

Harris County, Tex. 

Harris Hospital, Fort Worth, Tex. 

Hartsville, N.C City and Water Commission 

Hatboro, Pa. 

Hillsboro Beach, Fl. 

Hillsboro, Fl. Community Services Administration 

Honolulu, Haw. Board of Water 



278 



QUESTION #14 (continued) - 10 - 



Honolulu City and County, Hawaii 
Hononegah, 111. School District 
Horseheads, NT School District 
Houston, Tax. Bousing Authority 
Howard , Hich. 

Hurley Hedical Center, Flint, Mich. 
Huron Valley, Mich. Public Schools 
Huntington Beach, Calif. 



Ipswich, Mass. 



Jacksonville, Fl. 

Jamesville-Dewitt NY Central School District 



Kamehameha Schools, Honolulu 

Kauai County Water Board, Hawaii 

Ken Carly, Col. Water and Sanitation District 

Kiskl, Pa. Area School Authority 

Konia Regional Corp. Alas. 



279 



QUESTION #14 (continued) 



- 11 



Lanai, Hawaii Community Hospital 

Lancaster, Pa. 

Lane, Or. Regional Air Pollution Authority 

Las Virgenea, Calif. Municipal Water District 

Lexington , Ky. Housing Authority 

Lincoln Heights, Oh. 

Lincoln Park, Mich. Housing Commission 

Livonia, Mich. 

Long Beach, Calif. Community Hospital 

Los Angeles, Calif. Board of Education 

Los Angeles, Calif. Community College District 

Los Angeles, Calif. Department of Airports 

Los Angeles, Calif. Grand Jury 

Los Angeles, Calif. Harbor Department 

Los Angeles, Calif. Memorial Coliseum 

Louisville, Ky 

Louisville and Jefferson County Air Board 

Lower Merion, Pa. School District 

Lower Pioneer Regional Transit Authority, Springfield, Mass. 



Mackinac, Mich. Bridge Authority 
Maui County, Hawaii 
Maui, Hawaii United Way 



280 



QUESTION #14 (continued) - 12 - 



Maui, Hawaii Memorial Hospital 

Maui, Hawaii Water Board 

Mel vindale-Nort hern Allen Park, Mich. School District 

Metropolitan Area Planning Council, Boston, Mass. 

Metropolitan Service District, Portland, Or. 

Miami-Dade Water and Sewer Authority 

Miami Shores, PI. 

Miami Valley, Ohio Regional Transit Authority 

Mid-Peninsula Coalition Housing, Palo Alto, Calif. 

Milwaukie, Or. 

Mishawaka, Ind. 

Monongahela General Hospital 

Morris County Library System 

Mount Vernon, NY 

Multnomah County, Or. 

Murphy-Blair Bousing Development, St. Louis, Mo. 

Murray, Utah 

Museum of Science and Natural History, St. Louis, Mo. 



Neshaminy School District, Pa. 

Newark, NJ 

Newark, NJ Bousing Authority 

New Orleans, La. Housing Authority 

New York City Bousing Authority 

New York Regional Plannina Association 



281 



QUESTION #14 (continued) - 13 



Nile*, Mich. (City and Board of Public Works) 

Norfolk, Va. 

North Broward , Fl. Hospital District 

North Clackamas, Or. School District 

North Dearborn Heights, Mich. School District 

North Kingston, RI 

North Miami, Fl. 

Northwestern Palm Beach Hospital District, Fl. 

Norwalk, Conn. 



Oakland, Calif. 

Oakland, Calif. Port Authority 

Orlando, Fl. Central City Development Board 

Orlando, Fl. Housing Authority 

Oronoko, Mich. 



Palm Beach, Fl. Health Planning Council 
Parkview Memorial Hospital, Fort Worth, Tex. 
Pawating, Mich. Hospital 
Peninsula Air Commission, Va. 
Peninsula Industrial Committee, Va. 
Peninsula Planning Commission, Va. 



282 



QUESTION #14 (continued) - 14 - 



Petersburg, Va. Housing and Redevelopment Authority 

Philadelphia City Council 

Philadelphia General Hospital, Pa. 

Phoenix , Ariz. 

Phoenix, Ariz. Housing Authority 

Pleasant Hill Recreation and Park District 

Pleasant Valley, Or. School District 

Pompano Park., Fl. 

Portage Borough, Pa. Hater Authority 

Port Everglades , PI. Authority 

Portland, Or* 

Portland, Or. School District 

Portland, Or. Metropolitan Steering Committee 

Portland, Or. Fire and Police Retirement Fund 

Portland, Or, If a tar Bureau 

Portland, Or. Development Commission 

Portland, Or. Port 

Portsmouth, NH 

Portsmouth, Mass 

Port Washington, Wis. City and School District 

Poughkeepsle, NY Housing Authority 



Raleigh, NC Bousing Authority 
Ridgfield, Conn. 



283 

QUESTION #14 (continued) - 15 - 



Rochester, Mich. Community Schools 

Rock ford. 111. 

Rock ford, 111. Public Library 

Rock ford, 111. School District 

Rock vi lie Center, NY Or ban Renewal Agency 



Sacramento County, Calif. 

Saginaw, Detroit, Community Hospital 

Salisbury-Rowan, NC Community Service Council 

Saluda, NC 

San Bernardino, Calif. Electric Co. 

Sanford, Fl. Bousing Authority 

San Mateo, Calif. 

Santa Clara County, Calif. 

Sapry County, Neb. 

Seattle, Wash. City Light 

Seattle, Wash. Board of Public Instruction 

Self Memorial Hospital, SC 

Sellersville Police Pension Fund, Pa. 

Selswik, Alas. 

South Beloit, 111. School District 

South Broward, Fl. Hospital District 

Southeast Michigan Council of Governments 

Southeastern Tidewater Opportunity Porgraa, Va. 

Southeastern Tidewater Area Management, Va. 

Southeastern Planning District, Va. 



67-159 O - 77 - 20 



284 

QUESTION #14 (continued) - 16 - 



Southeastern Virginia Area Manpower Authority 

South Lane, Or. School District 

Spokane, Wash. 

Spokane, Wash. Health District 

Spokane, Wash. International and Felts Pield Airports 

St. Louis County, Mo. Special School District 

St. Louis County, Mo. 

Statesville, NC. 0E0 Grant 

Syracuse, NY School District 

Suffolk, Va. 



Tempe, Ariz. Union High School District 

Tigard, Or. 

Tigard, Or. Water District 

Tredyffrin Township, Pa. Sever District 

Tri-County Metropolitan Transit District, Portland, Or, 

Troy, Mich. School District 

Tualatin, Or. 

Tualatin Valley Irrigation District, Or. 

Tulsa, Okla. General Hospital 

Twin County Utility, PI. 



Union High School System, Pheonis, Aria. 
Upper Merlon, Pa. School District 



285 



QUESTION #14 (continued) 17 - 



Van Bur en County, Mich. Road Commission 
Vestal, NY School District 
Village of Three Oaks, Mich. 



Walton Village, NY 

Washington County School District, Or. 

Watervliet, Mich. Township 

Wayne County, Mich. Department of Health 

West Deer Township, Pa. School Authority 

West Genesee Central School District, NY 

West Leechburg, Pa. Water Authority 

West Massachusetts, Health Planning Council 

HeBthill Central School District, NY 

Westmoreland County, Pa. Municipal Water Authority 

Wheat Ridge, Colo. Water Dietrict 

Winston-Sal em, NC Housing Authority 

Woods Bole, Mass. 

Wyandotte, Mich. 

Wyandotte, Mich. Department of Municipal Services 

Wyomissing Pol ice Pension Fund, Pa. 

Yakutat, Alas. 
Yamhill County, Or. 



286 



FEDERAL L"JTITIES FOR WHCX SZkVlCZS 
WERE PERFORMED LURING CALZN"DAR YZARS 
1970 thru 1974 



19' 



Agency for International Development 

Federal Reserve Board 

U.3. Oir-ica of Education 

Department of Justice 

Dcp&rti^ent of lielath, Education and Welfare 



1971 



Securities Investor Protection Corporation 

Federal koeerve Board 

U.fo. Office of Education 

DeparfcT»ynt of Justice 

Department of Health, Education and Welfare 



1972 



Securities Investor Protection Corporation 

Federal nesorvo Board 

Environmental Protection Agency 

U.S. Office of Eduction 

Department of Health, Education and Welfare 

Department of Justice 

DOD CawatGr Institute 



1?^ 



.aterans Administration 

Federal reserve Systems 

Erivironncr.f-.al Protection Agency 

U.S. Office of Education 

Bureau of narcotics and Da:-<*<2rcu2 Druc?3 

Law ; enforcement Assistance ^«da>ini£tx&ition 

Army Arnements CcrrCTand 

Dep— fc^enfc of Health, Education and Welfare 

Of ilea of Kanayaacnt and Lr,dget 



1974 



Co.~t of Living Council 

Federal Energy Office 

Int vefcato Ccnsaerce Ccasais&ion 

Bare iu or Mines 

Hou&e of Representatives 

Dcpo^tt&ent of Agriculture 

Federal Aviation Administration 

Anr.y Ajrrvassento Command 

Drug Enforcement Atkniriistr&tio?* 

Lav? Ec^crceaent Assistance Ac-. .*.nictration 

U.S. Office of Education 

Of££eo of lianagesxent and Dudgefc 

^oatal Service 



287 
Answer to Question #16 



ANNUAL GROSS REVENUES FOR SERVICES 
PERFORMED FOR FEDERAL ENTITIES 
DURING CALENDAR YEARS 1970 thru 1975 



1970 $532,000 

1971 $757,000 

1972 $589,000 

1973 $1,063,000 

1974 $789,000 

1975 $2,473,000 



NOTE: FIGURES ROUNDED TO NEAREST THOUSAND 



288 



ABRAHAM RlBlCOFF. CONN., CHAIRMAN 



JOHN L. MC CLELLAN. ARK. 
HENRY M. JACKSON. WASH. 
EDMUND S. MUSKIE. MAINE 
LEE METCALF. MONT. 
JAMES B. ALLEN. ALA. 
LAWTON CHILES, FLA. 
SAM NUNN, QA. 
JOHN GLENN, OHIO 



CHARLES H. PERCY, ILL. 
JACOB K. JAVITS, N.Y. 
WILLIAM V. ROTH, JR., DEL. 
BILL BROCK, TENN. 
LOWELL P. WEJCKER, JR-, CONN. 



SUBCOMMITTEE: 
LEE METCALF. MONT., CHAIRMAN 
JOHN L. MC CLELLAN, ARK. BILL BROCK. TENN. 

EDMUND B. MUSKIE, MAINE CHARLES H. PERCY, ILL. 

BAM NUNN. OA. LOWELL P. WEICKER, JR., CONN. 

JOHN OLENN, OHIO 



QlCutieb J£>{aie& J&enaie 

COMMITTEE ON 

GOVERNMENT OPERATIONS 

SUBCOMMITTEE ON REPORTS. 

ACCOUNTING. AND MANAGEMENT 

(PURSUANT TO SEC. 7, S. RES. SO. MTH CONGRESS) 

WASHINGTON, D.C. 20310 



VIC REINEMER. STAFF DIRECTOR 
E. WTNSLOW TURNER. CHIEF COUNSEL 

let RU53EU. BUILDING 

(202) 224-1474 



1 March, 1976 



Mr. Philip L. Defliese 

Managing Partner 

Coopers 5 Lybrand 

1251 Avenue of the Americas 

New York, New York 10020 

Dear Mr. Defliese: 

I have your response of 19 February to this subcommittee's 
accounting questionnaire. Your letter accompanying the re- 
sponse asks confidential treatment for questions six, seven, 
eleven and sixteen. 



Six of the eight firms responding to the questionnaire saw 
no need to request confidentiality. In view of the open re- 
sponses by other accounting firms and the need for authoritative 
information on the accounting profession by Congress and the 
public, I strongly urge that you reconsider your request for 
confidential treatment of certain portions of your firm's 
response. 

Although the questionnaire and my letter of transmittal 
offered no pledge of confidentiality for your response, I will 
honor your request if you should reaffirm it after reconsidera- 
tion. However, that grant of confidentiality shall be noted in 
any publications or proceedings which may be undertaken by this 
subcommittee regarding accounting matters, and shall not extend 
to any information which is obviously in the public domain. 

I shall appreciate a prompt response regarding reconsidera- 
tion of the request for confidentiality. 

Very truly yours, 

Original signed by 
Lee Metcalf 



289 



COOPERS 80 LYBRAND 

1251 Avenue of the Americas 
New York, N.Y. 10020 



Hon. Lee Metcalf, Chairman 
Subcommittee on Reports, 

Accounting and Management 
United States Senate 
l6l Russell Building 
Washington, D. C. 20510 

Dear Senator Metcalf: 



PHILIP L. DEFLIESE 

MANAGING PARTNER 



March 26, 1976 



Thank you for your letter of March 1 with respect 
to Coopers & Lybrand's response to your Subcommittee's 
accounting questionnaire. 

My Firm does not dispute the need for authoritative 
information by your Subcommittee and has fully cooperated in 
providing it. This, however, in no way changes the character 
of that information as proprietary material relating to a 
private partnership. 

We did not consult with the other firms referred to 
in your letter and therefore I do not know the reasons why 
they waived confidential treatment of similar information 
private to their practice. I sincerely doubt whether these 
firms would provide Coopers & Lybrand with such information 
if we were to request it of them. 

With respect to the third paragraph of your letter 
my Firm would have no problem with your noting its request 
for confidentiality in any publications or proceedings which 
may be undertaken by your Subcommittee. However, since you 
seem to believe that lack of confidentiality is necessary to 
the work of your Subcommittee, my Firm reluctantly acquiesces 
to your request. 

We note that this information is not in the public 
domain and we would request that your Subcommittee use re- 
straint in the dissemination of it. If there is to be public 
dissemination, we would appreciate receiving at your earliest 
convenience copies of the information supplied by the other 
firms to which you refer who do not see any need for confi- 
dentiality. 

Very truly yours^. 



PLD:dem 







290 
ERNST 5c ERNST 

UNION COMMERCE BUILDING 

CLEVELAND, OHIO -44115 



February 12, 1976 



The Honorable Lee Metcalf 
Chairman , Subcommittee on Reports 

and Accounting Mangement 
Committee on Government Operations 
United States Senate 
Washington, D. C. 20510 

Dear Senator Metcalf: 

In response to your letter of December 19, 1975, we 
submit the attached data requested in your questionnaire . 

If you need further information to interpret the 
responses to the questionnaire, or if we can be of any further 
assistance in meeting the goals of the Subcommittee, please do 
not hesitate to call . 



Sincerely , 



R. T. Baker 
Managing Partner 



RTB/nm 
enclosure 



291 



ERNST 5. ERNST 

Reports, Accounting and Management Subcommittee 
Answers to Questionnaire. 

1. Please state the number of offices which your firm maintains within 
the United States. 

112 

2. Please indicate the number of states, territories or possessions of the 
United States in which your firm maintains an office or affiliated office, 

45 states 

3. Please state the number of cities outside the United States in which your 
firm maintains offices or has an affiliation. 

146 

4. Please state the number of partners in your firm located in the United 
States (include only certified public accountants.) 

484 partners 

5. Please state the number of principals located in your offices in the 
United States who are not certified public accountants. 

20 principals 

6. Please state the total number of employees of your firm within the United 
States, excluding only partners and principals. 

5,795 employees 

7. Please indicate the approximate percentage of total revenues for services 
performed by your firm in the following categories. 

It is frequently difficult to classify the types of services provided our 
clients. This response is based on our internal recording procedures. 

A. Auditing and accounting - 73 

B. Tax services - 17 

C. Management advisory services including executive, 
recruitment, product analysis, marketing analysis, 
and plant layout. - 9 

D. Actuarial services - 

E. Services performed for Federal, State or local 
governments - 1 

F. Other - 



292 



ERNST 5 ERNST 

8. Please state if your firm renders management or other advisory services 
in the following categories: 

A. Executive recruitment - Yes 

B. Marketing analysis - Yes 

C. Plant layout - Yes 

D. Product analysis - Yes 

E. Actuarial services - No 

F. Federal advisory committees - No. 

9. Please state the name and address of corporations listed on the New York 
Stock Exchange for which your firm is the independent auditor. 

See list attached 

10. Please state the name and address of corporations listed on the American 
Stock Exchange for which your firm is the independent auditor. 

See list attached 

11. Please state the number of other publicly-held corporations for which 
your firm is the independent auditor, and the number of privately held 
corporations for which your firm is the independent auditor. 

Other publicly-held corporations - approximately 700 
Privately held corporations - approximately 9,000 

12. Please indicate the total number of partners, principals and employees of 
your firm who are members of the American Institute of Certified Public 
Accountants . 

Partners 484 

Employees 2 , 246 

Total 2,730 

(As of July 31, 1975, last reporting date.) 

13. Please state if your firm has made financial contributions, directly or 
indirectly, to the Financial Accounting Standards Board. If so, please 
indicate the amount of contributions made annually to date. 

1975 $200,000 

1974 200,000 

1973 200,000 

14. Please identify the department, agencies or subdivisions of any federal, 
state, municipal or other government authority for which your firm performed 
any services during 1975. 

See list attached 



293 



ERNST 5. ERNST 



15. Please identify the federal departments, agencies, subdivisions or 
authorities for which your firm has performed services during each year 
from Jan. 1, 1970 through Dec. 31, 1974. 

See list attached 

16. Please state your firm's annual gross revenue from services performed 
for Federal departments, agencies, subdivisions or authorities during 
each year from Jan. 1, 1970 to Dec. 31, 1975. 

1975 $1,025,000 

1974 701,000 

1973 1,106,000 

1972 1,533,000 

1971 952,000 

1970 584,000 

17. Please state if your firm maintains a department, division or office for 
the procurement of Federal, State and local government contracts. If so, 
please indicate the name of the person(s) in charge of said department, 
division or office, and address of such office(s). 

Arthur Kober 

Director of Federal Programs 
1225 Connecticut Ave., N. W. 
Washington, D. C. 20036 



294 



ERNST 5. ERNST 



Question 9. 



New York Stock Exchange Clients 



Name 



Address 



Acme-Cleveland Corp. 

Adams-Millis Corp. 

Alco Standard Corp. 

Amerace Corp. 

American Finance System Inc. 

American General Bond Fund 

American General Convertible Securities 

American General Insurance Co. 

Apeco Corp. 

Archer-Daniels-Midland Co. 

Arkansas Best Corp. 

Armstrong Rubber Co. 

Arthur G. McKee & Co. 

Ashland Oil, Inc. 

Bandag , Inc . 

Bank of Virginia Co. 

Basic Inc. 

Becton, Dickinson and Co. 

Beech Aircraft Corp. 

Big Three Industries, Inc. 

Brown Co. 

Brown Group, Inc. 

Brush Wellman Inc. 

Buffalo Forge Co. 

Capital Holding Corp. 

Cincinnati Milacron Inc. 

Clark Oil & Refining Corp. 

Coca-Cola Bottling Company of N.Y. 

Coldwell, Banker & Co. 

Continental Illinois Corp. 

Copeland Corp. 

Cowles Communications, Inc. 

Crane Co. 

Dayco Corp. 

Dayton-Hudson Corp. 

Dennison Manufacturing Co. 

E- Systems, Inc. 

Eaton Corp. 

Eli Lilly and Co. 

Federal-Mogul Corp. 

First Virginia Bankshares Corp. 

Fisher Foods, Inc. 

Florida Steel Corp. 

Fuqua Industries, Inc. 

Gable Industries, Inc. 

Gateway Industries, Inc. 

General American Oil Company of Texas 



Cleveland, Oh 
High Point, NC 
Valley Forge, Pa 
New York, NY 
Wilmington, De 
Baltimore, Md 
Baltimore, Md 
Houston, Tx 
Evans ton, II 
Decatur, II 
Fort Smith, Ar 
New Haven, Ct 
Independence, Oh 
Russell, Ky 
Muscatine, la 
Richmond , Va 
Cleveland, Oh 
Rutherford, NJ 
Wichita, Ks 
Houston, Tx 
Pasadena, Ca 
Saint Louis, Mo 
Cleveland, Oh 
Buffalo, NY 
Louisville, Ky 
Cincinnati, Oh 
Milwaukee, Wi 
Hackensack, NJ 
Los Angeles, Ca 
Chicago, II 
Sidney, Oh 
New York, NY 
New York, NY 
Dayton, Oh 
Minneapolis, Mn 
Framingham, Ma 
Dallas, Tx 
Cleveland, Oh 
Indianapolis, In 
Southfield, Mi 
Falls Church, Va 
Bedford Heights, Oh 
Tampa, Fl 
Atlanta, Ga 
Atlanta, Ga 
Chicago, II 
Dallas, Tx 



295 



ERNST 5. ERNST 



Question 9. 

Name 

General American Transportation 

General Medical Corp. 

Genuine Parts Co. 

Gerber Products Co. 

GF Business Equipment, Inc. 

Giant Portland Cement Co. 

Gibraltar Financial Corporation 

Gif ford-Hi 11 & Company, Inc. 

Gleason Works 

Gould Inc. 

Gray Drug Stores, Inc. 

Great Northern Iron Ore Properties 

Gulf & Western Industries, Inc. 

Hanes Corp. 

Harris Corp. 

Harte-Hanks Newspapers, Inc. 

Hoover Ball and Bearing Co. 

Hospital Corporation of America 

J. M.- Smucker Co. 

John Hancock Income Securities Corp. 

John Hancock Investors Inc. 

Jos tens , Inc . 

Keller Industries, Inc. 

Knight-Ridder Newspapers, Inc. 

Leesona Corp. 

Libbey-Owens-Ford Co. 

Lincoln National Corp. 

Lincoln National Direct Placement Fund 

Lomas & Nettleton Financial Corp. 

Lomas & Nettleton Mortgage Investors 

Ma lone & Hyde, Inc. 

Manpower, Inc. 

Marathon Oil Co. 

Martin Marietta Corp. 

Maytag Co. 

McCord Corp. 

McDonnell Douglas Corp. 

McLean Trucking Co. 

McLouth Steel Corp. 

Medusa Corp. 

Midland-Ross Corp. 

Missouri Portland Cement Co. 

Montgomery Street Income Securities 

Mortgage Trust of America 

Morton-Norwich Products, Inc. 

Mountain Fuel Supply Co. 

Murray Ohio Manufacturing Co. 



Address 

Chicago, II 
Richmond , Va 
Atlanta, Ga 
Fremont , Mi 
Youngs town, Oh 
Columbia, SC 
Beverly Hills, Ca 
Dallas, Tx 
Rochester, NY 
Chicago, II 
Cleveland, Oh 
Saint Paul, Mn 
New York,' NY 
Winston-Salem, NC 
Cleveland, Oh 
San Antonio, Tx 
Saline, Mi 
Nashville, Tn 
Orrville, Oh 
Boston, Ma 
Boston, Ma 
Minneapolis, Mn 
Miami, Tl 
Miami, Fl 
Warwick, RI 
Toledo, Oh 
Fort Wayne, In 
Chicago, II 
Dallas, Tx 
Dallas, Tx 
Memphis, Tn 
Milwaukee, Wi 
Find lay, Oh 
Rockville, Md 
Newton, la 
Detroit, Mi 
Saint Louis, Mo 
Winston-Salem, NC 
Detroit, Mi 
Cleveland Heights, Oh 
Cleveland , Oh 
Saint Louis, Mo 
San Francisco, Ca 
San Francisco, Ca 
Chicago, II 
Salt Lake City, Ut 
Brentwood, Tn 



296 



ERNST 6. ERNST 



Question 9. 

Name 

Nalco Chemical Co . 

National Gypsum Co. 

National Mortgage Fund 

National Steel Corp. 

NLT Corp. 

North American Coal Corp. 

Northwest Airlines, Inc. 

Peter Paul, Inc. 

Pittsburgh Forgings Co. 

Pizza Hut, Inc. 

Ponderosa System, Inc. 

R. J. Reynolds Industries, Inc. 

Redman Industries, Inc. 

Reliance Electric Co. 

Republic Steel Corp. 

Reynolds Metals Co. 

Reynolds Securities, Inc. 

Robertshaw Controls Co. • 

Rosario Resources Corp. 

Scot Lad Foods, Inc. 

Scovill Manufacturing Co. 

Shakespeare Co. 

Sherwin-Williams Co. 

Standard Oil Company of Ohio 

Texas Commerce Bancshares, Inc. 

Texas Industries, Inc. 

The B. F. Goodrich Co. 

The Black and Decker Manufacturing Co. 

The Cleveland-Cliffs Iron Co. 

The Coca-Cola Co. 

The Hanna Mining Co. 

The Lamson & Sessions Co. 

The LTV Corp. 

The Outlet Co. 

The Stanley Works 

The Times Mirror Co. 

The Wachovia Corp. 

The Warner & Swasey Co. 

The Weatherhead Co. 

Thomas Industries, Inc. 

Time Inc. 

Timken Co. 

Tonka Corp. 

Transamerica Corp. 

Tropicana Products, Inc. 

TRW Inc. 



Address 

Oak Brook, II 
Buffalo, NY 
Rocky River, Oh 
Pittsburgh, Pa 
Nashville, Tn 
Cleveland, Oh 
St. Paul, Mn 
Naugatuck, Ct 
Pittsburgh, Pa 
Wichita, Ks 
Dayton, Oh 
Winston-Salem, NC 
Dallas, Tx 
Cleveland, Oh 
Cleveland, Oh 
Richmond , Va 
New York, NY 
Richmond , Va 
New York, NY 
Lansing, II 
Waterbury, Ct 
Columbia, SC 
Cleveland, Oh 
Cleveland, Oh 
Houston, Tx 
Dallas, Tx 
Akron, Oh 
Tows on, Md 
Cleveland, Oh 
Atlanta, Ga 
Cleveland, Oh 
Cleveland, Oh 
Dallas, Tx 
Providence, RI 
New Britain, Ct 
Los Angeles, Ca 
Winston-Salem, NC 
Cleveland, Oh 
Cleveland, Oh 
Louisville, Ky 
New York, NY 
Canton, Oh 
Hopkins, Mn 
San Francisco, Ca 
Bradenton, Fl 
Cleveland, Oh 



297 



ERNST 5. ERNST 



Question 9. 

Name Address 

U. S. Industries, Inc. New York, NY 

U. S. Realty Investments Cleveland, Oh 

United Industrial Corp. New York, NY 

United States Tobacco Co. Greenwich, Ct 

V.F. Corp. Wyomissing, Pa 

Wang Laboratories, Inc. Tewksbury, Ma 

Washington National Corp. Evanston, II 

Weil-McLain Company, Inc. Dallas, Tx 

Western Bancorporation Los Angeles, Ca 

Whirlpool Corp. Benton Harbor, Mi 

White Consolidated Industries Cleveland, Oh 

White Motor Corp. Cleveland, Oh 

Wieboldt Stores, Inc. Chicago, II 

Wolverine World Wide, Inc. Rockford, Mi 

Zurn Industries, Inc. Erie, Pa 



298 



ERNST & ERNST 



Question 10. 



American Stock Exchange Clients 



Name 



Address 



A. T. Cross Co. 

Acme-Hamilton Manufacturing Co. 

Affiliated Hospital Products, Inc. 

Altamil Corp. 

Altec Corp. 

American Biltrite Inc. 

American Recreation Group, Inc. 

AMIC Corp. 

Anken Industries 

Anthony Industries, Inc. 

Applied Devices Corp. 

Arizona-Colorado Land & Cattle 

Ashland Oil Canada Ltd. 

Aspro, Inc. 

Barry Wright Corp. 

Berven Carpets Corp. 

Bodin Apparel, Inc. 

Brad Ragan, Inc. 

Brooks & Perkins, Inc. 

Bundy Corp . 

C. H. Masland & Sons 

Cablecom-General, Inc. 

Capitol Food Industries, Inc. 

Carbon Industries, Inc. 

Castleton Industries, Inc. 

Charter Medical Corp. 

CHC Corp. 

Child World, Inc. 

Clarke-Gravely Corp. 

Clausing Corp. 

Cohen-Hat field Industries, Inc. 

Conroy, Inc. 

Cook Electric Co. 

Cook Paint and Varnish Co. 

Crowley, Milner and Co. 

Crown Central Petroleum Corp. 

Crystal Oil Co. 

Cubic Corp. 

Diamond M Drilling Co. 

Dillard Department Stores, Inc. 

Diodes Inc. 

Driver-Harris Co. 

E. T. Barwick Industries, Inc. 

Electronic Research Associates, Inc. 



Lincoln, RI 
Trenton, NJ 
Saint Louis, Mo. 
Fernwood , Ms . 
Richardson, Tx 
Cambridge, Ma 
New York, NY 
Raleigh, NC 
Morristown, NJ 
South Gate, Ca 
Hauppauge, NY 
Phoenix, Az 
Calgary, AB 
Westport, Ct 
Watertown, Ma 
Fresno, Ca 
Miami, Fl 
Spruce Pine, NC 
Southfield, Mi 
Detroit Mi 
Carlisle, Pa 
Denver, Co 
Chicago, II 
Charleston, WV 
Pompano Beach, Fl 
Macon, Ga 
Towson, Md 
Avon , Ma 
Muskegon, Mi 
Kalamazoo, Mi 
New York, NY 
San Antonio, Tx 
Morton Grove, II 
North Kansas City, Mo 
Detroit, Mi 
Baltimore,Md. 
Shreveport, La 
San Diego, Ca 
Houston, Tx 
Little Rock, Ar 
Woodland Hills, Ca 
Harrison, NJ 
Chamblee, Ga 
Moonachie, NJ 



299 



F.RNST & ERNST 



Question 10. 
Name 

F. W. Means & Co. 

Federal Resources Corp. 

First of Denver Mortgage Investors 

First S&L Shares, Inc. 

Flagg Industries, Inc. 

FDX-Stanley Photo Products, Inc. 

Friedman Industries, Inc. 

Frontier Airlines, 'Inc. 

Garcia Corp. 

General Employment Enterprises 

Geo. A. Hormel & Co. 

Glen-Gery Corp. 

Gorman- Rupp Co . 

Great Lakes Chemical Corp. 

Gross Telecasting, Inc. 

Grow Chemical Corp. 

Guardsman Chemical Inc. 

Harman International Industries, Inc. 

Hospitality Motor Inns, Inc. 

Huck Manufacturing Co. 

Imperial Industries, Inc. 

Inarco Corp. 

International Banknote Company 

International Couriers Corp. 

International Proteins Corp. 

International Stretch Products, Inc. 

Killearn Properties, Inc. 

Kin- Ark Corp. 

Laneco, Inc. 

Lea-Ronal, Inc. 

Leigh Products, Inc. 

Louisville Cement Co. 

Mammoth Mart, Inc. 

McDonough Co. 

New Process Co. 

Nuclear Data, Inc. 

Ohio Brass Co. 

Onan Corp. 

Oriole Homes Corp. 

Overhead Door Corp. 

Paramount Packaging Corp. 

Patagonia Corp. 

Pittsburgh-Des Moines Steel Co. 

Pneumo Corp. 

R. H. Medical Services, Inc. 

Ransburg Corp. 

Risdon Manufacturing Co. 

Roblin Industries, Inc. 

RPS Products, Inc. 



Address 

Chicago, II 
Salt Lake City, Ut 
Denver , Co 
Denver , Co 
Los Angeles, Ca 
San Antonio, Tx 
Houston, Tx 
Denver , Co 
Teaneck, NJ 
Chicago, II 
Austin, Mn 
Reading, Pa 
Mansfield, Oh 
West Lafayette, In 
Lansing, Mi 
New York, NY 
.Grand Rapids, Mi 
Lake Success, NY 
Cleveland, Oh 
Detroit, Mi 
Miami, Fl 
Twinsburg, Oh 
New York, NY 
Chicago, II 
Fairfield, NJ 
New York, NY 
Tallahassee, Fl 
Tulsa, Ok 
Easton, Pa 
Freeport, NY 
Grand Rapids, Mi 
Louisville, Ky 
West Bridgewater, Ma 
Parker sburg, WV 
Warren, Pa 
Schaumburg, II 
Mansfield, Oh 
Minneapolis, Mn 
Margate, Fl 
Dallas, Tx 
Chalfont, Pa 
Tucson, Az 
Pittsburgh, Pa 
Boston, Ma 
Elkins Park, Pa 
Indianapolis, In 
Naugatuck, Ct 
Buffalo, NY 
Baltimore, Md 



67-159 O - 77 - 21 



300 



ERNST 5. ERNST 



Question 10. 

Name 

Russell Corp. 

Schiller Industries, Inc. 

Shelter Resources Corp. 

Sigma Instruments, Inc. 

Sikes Corp. 

Southeastern Capital Corp. 

Spartek Inc. 

Standard Alliance Industries 

STP Corp. 

Sunshine-Jr. Stores, Inc. 

Tejon Ranch Co. 

Tenna Corp. 

The Coleman Company, Inc. 

The Eastern Co. 

The Harvey Group Inc. 

The Ohio Art Co. 

The Valspar Corp. 

Thriftimart, Inc. 

Tidwell Industries, Inc. 

Tracor, Inc. 

Tuftco Corp. 

U.S. Reduction Co. 

Universal Cigar Corp. 

U & I, Inc. 

Valley Metallurgical Processing Co., Inc 

Valmac Industries, Inc. 

Vermont American Corp. 

Vertipile, Inc. 

Vishay Intertechnology, Inc. 

Walco National Corp. 

Weiman Company, Inc. 

Whitehall Corp. 



Address 

Alexander City, Al 
Warren, Mi 
Lyndhurst, Oh 
South Braintree, Ma 
Lakeland, Fl 
Atlanta, Ga 
Canton, Oh 
Oak Brook, II 
Fort Lauderdale, Fl 
Panama City, Fl 
Los Angeles, Ca 
Cleveland, Oh 
Wichita, Ks 
Naugatuck, Ct 
Woodbury, NY 
Bryan, Oh 
Minneapolis, Mn 
Los Angeles, Ca 
Haleyville, Al 
Austin, Tx 
Chattanooga, Tn 
East Chicago, In 
New York, NY 
Salt Lake City, Ut 
New York, NY 
Memphis, Tn 
Louisville, Ky 
Leominster, Ma 
Malvern, Pa 
New York, NY 
Chicago, II 
Dallas, Tx 



301 



ERNST 5. ERNST 



14. Services performed for: 



Federal: 

Department of Agriculture 

Department of Commerce 

Department of Health, Education & Welfare 

Department of Transportation 

Environmental Protection Agency 

National Science Foundation 

U. S. Postal Service 

State, Municipal or Other Government Authority: 

Allegheny County Office of Economic Opportunity, Pittsburgh 

Arizona Outdoor Recreation Coordinator 

Community Services Association, Jackson, Miss. 

Dekalb Water & Sewer Department, Atlanta 

D. C. Public Service Commission 

Hawaii (State of) -Campaign Spending 

Industrial Development Board - Memphis 

Mahoning-Trumbull Council of Government 

Metropolitan Emergency Medical Service - Atlanta 

Model Cities-Board of Education-St . Louis 

Mississippi Regional Housing Authority-jackson, Miss. 

Multnoman County Public Works Department, Portland, Ore. 

Muskegon County Wastewater Management 

New England Regional Commission, Boston 

New York City Fire Department 

Regional Transportation Authority - Chicago 

Royal Palm Improvement Association - Ft. Lauderdale 

Toledo Metropolitan Park District 

Town of Hastings, Florida 

Washington, D. C. Metro Area Transportation 

Piedmont Triad Council of Government 

Cleveland, City of, Office of the Mayor 

Cleveland City Council 

Cuyahoga County Data Processing Board 

City of Akron Water Pollution Control 

Medina, Ohio, City of 

Medina, Ohio, County Board of Commissioners 

Sodus, New York, Village of 

Syracuse, City of 

Onondaga County, N. Y., Personnel Department 

City of Toledo, Model Cities 

Fulton County, Georgia, County Government 

St. Cloud, Florida, City of 

Daytona Beach, City of 

Salley, South Carolina, Town of 

Genesee, Michigan, County of 



302 



ERNST 5. ERNST 

14. State, Municipal or Other Government Authority: (continued) 

Wayne County, Michigan, Board of Auditors 

Wayne County, Michigan, Circuit Court 

Washtenaw County, Michigan, Drain Commission 

Parchment, Michigan, City of 

Lake Forest, Illinois, City of 

Marquette, City of 

Republic Township, Michigan 

Boise, City of 

Boise, City of, Mud Project 

Oakland County, California 

San Jose, California, City of 

New Jersey Department of Civil Service 

New Jersey Department of Institutions 

Governor's Council for Cost Control (Ohio) 

Ohio Department of Health 

Ohio Department of Mental Health or Retardation 

Cincinnati (City of) 

West Virginia Housing Development 

Alabama (State of) Budgets 

Michigan Supreme Court 

Wayne County (Michigan) Juvenile Court 

Michigan Department of Commerce 

Michigan Department of Agriculture 

Wyoming, State of 

Wisconsin Council on Criminal Justice 

Arkansas, State of 

Seattle, City of-Office of Community Development 

Washington, State of 

Washington, State Legislature 

New York City, Department of Consumer Affairs 

Revere, Massachusetts, City of 

North Kingston, Rhode Island, Town of 

Norwich, Connecticut, City of 

Cumberland, Maryland, City of 

Harrisburg, Pennsylvania, Redevelopment Authority 

Washington, D. C. Public Service Commission 



303 



ERNST & ERNST 

15. Services performed for federal departments, agencies, subdivisions, 
or authorities: 

1970 

Agency for International Development 

Department of Agriculture 

Department of Commerce 

Department of Housing and Urban Development 

Department of Labor 

Department of Health, Education & Welfare 

Department of Transportation 

Economic Development Administration 

Food and Drug Administration 

National Academy of Science 

United States Post Office Department 

1971 

Agency for International Development 
Department of Health, Education and Welfare 
Department of Housing and Urban Development 
Department of Transportation 
Economic Development Administration 
Food and Drug Administration 
General Services Administration 
United States Postal Service 

1972 

Atomic Energy Commission 

Department of Agriculture 

Department of Army - Corps of Engineers 

Department of Commerce 

Department of Health, Education & Welfare 

Environmental Protection Agency 

Federal Railway Administration 

United States Postal Service 

Treasury Department 

1973 

Cost of Living Council 

Department of Commerce 

Department of Army - Corp of Engineers 

Department of Transportation 

Environmental Protection Agency 

Department of Health, Education & Welfare 

United States Postal Service 



304 



ERNST & ERNST 



15. Services performed for federal departments, agencies, subdivisions, 
or authorities: (continued) 

1974 

Department Agriculture 

Department of Commerce 

Department of Maritime Administration 

Department of Health, Education & Welfare 

United States Postal Service 



305 



HASKINS & SELLS 

CERTIFIED PUBLIC ACCOUNTANTS 

Michael N. Chetkovich 

MANAGING PARTNER 



EXECUTIVE OFFICE 

1114 AVENUE OF THE AMERICAS 

NEW YORK, NEW YORK 10036 



February 17, 1976 



The Honorable Lee Metcalf 
United States Senate 
Subcommittee on Reports, 

Accounting and Management 
Washington, D.C. 20510 

Dear Mr. Metcalf: 

The information contained in the following sections 
of this document has been prepared in response to the question- 
naire enclosed with your letter of December 19, 1975- The nature 
of the data used in response to each question is described along 
with the answer to that question. Numerical data presented in 
this document are based on available internal records which are 
generally related to our fiscal year of fifty-two weeks ending 
on approximately May 31- 

We hope that this background information will be helpful 
to the Subcommittee. We shall be pleased to provide any further 
assistance that may be required to enable the Subcommittee to fully 
consider the specific matters noted in your letter of December 19. 



Very truly yours, 
Michael N. Chetkovich 



Enclosures 



306 



RESPONSE TO DECEMBER 19, 1975 QUESTIONNAIRE 

OF 
UNITED STATES SENATE 
COMMITTEE ON 
GOVERNMENT OPERATIONS 
SUBCOMMITTEE ON REPORTS, 
ACCOUNTING, AND MANAGEMENT 



QUESTION 1. Please state the number of offices which your firm 

maintains within the United States. (If more than one part- 
nership, corporation or other entity exists in the United 
States, please furnish all names and answer subsequent ques- 
tions accordingly). 

RESPONSE During the last fiscal year which ended May 31, 1975 
the Firms of Haskins & Sells had 93 offices within the United 
States. A listing of the Firm's offices which may be helpful 
to the Subcommittee is contained in Exhibit A, the most recent 
Directory published for use of our clients and personnel. All 
of our practice in the United States is conducted under the 
partnership name of Haskins & Sells. The responses to the 
questionnaire that follow have been prepared for that practice 



QUESTION 2. Please indicate the number of states, territories, or 
possessions of the United States in which your firm maintains 
an office or affiliated office. 

RESPONSE During the fiscal year ending May 31, 1975, Haskins & 
Sells maintained offices in forty states, territories, or pos- 
sessions of the United States. The Directory (Exhibit A) gives 
further detail as to the location of our offices. 



QUESTION 3- Please state the number of cities outside the United 
States in which your firm maintains offices or has an affil- 
iate office. 

RESPONSE During the last fiscal year which ended May 31, 1975, 
Haskins & Sells had an affiliation with firms that maintained 
offices in 137 cities outside the United States. These cities 
are shown in the Directory (Exhibit A) under the title of 
Deloitte, Haskins & Sells (pages 19-W . In addition, Haskins & 
Sells maintains relationships with a number of correspondent 
firms in cities outside of the United States. The locations 
of these correspondent firms are shown in the Directory (pages 
45-54). 



307 



QUESTION h. Please state the number of partners in your firm 

located In the United States (include only certified public 
accountants ) . 

RESPONSE At June 1, 1975 there were Hk3 active partners of 
Haskins & Sells located in the United States. All partners 
of Haskins & Sells are certified public accountants. 



QUESTION 5- Please state the number of principals located in 

your offices in the United States who are not certified public 
accountants . 

RESPONSE Haskins & Sells has no ''principals" in the firm who 
are not certified public accountants. We have assumed that 
the word "principal" is being used to describe an individual 
who has an equity in the firm and shares in the profits of 
the firm. In Haskins & Sells only partners, all of whom are 
certified public accountants, have such an equity position. 
At June 1, 1975 we did have, however, 12 individuals with the 
title "director", who function at the administrative level 
of a partner in the conduct of our Management Advisory Services 
practice. While directors share in the profits of the firm 
they do not have an equity in the firm. 



QUESTION 6. Please state the total number of employees of your 
firm within the United States, excluding only partners and 
principals . 

RESPONSE At May 31, 1975, Haskins & Sells had 4,798 employees 
located in the United States. 



QUESTION 7 • Please indicate the approximate percentage of total 
revenue for services performed by your firm in the following 
categories : 

A. Auditing and accounting 

B. Tax services 

C. Management advisory services, including executive 

recruitment, product analysis, market analysis, 
and plant layout 

D. Actuarial services 

E. Services performed for Federal, State or local 

government 

F. Other 



308 



RESPONSE For the year ended May 31, 1975, we have estimated 
from our statistical records that the revenues of Haskins & 
Sells were divided among the specified service categories as 
follows : 



A. Auditing and accounting 

B. Tax services 

C. Management advisory services 

D. Actuarial services 

E. Services performed for Federal, 

State or local government 



Other 



Total 



15 
5 
(See comment) 

(See comment) 

6 

100% 



Actuarial Services Haskins & Sells does not provide 
what we consider to be "actuarial services". We 
do utilize actuarial skills as required in our 
auditing and accounting services and accordingly 
any use of these skills is classified in our stat- 
istical records as auditing and accounting services. 
We estimate, however, that the revenue that might be 
related to use of these skills is a small fraction 
of 1% of our total revenue. 

Services for Government Entitie s We perform auditing 
and accounting and management advisory services for 
governmental entities. Data regarding our services is 
normally classified in our statistical records by the 
nature of the services performed and not by the type 
of entity served. We estimate, however, that revenues 
from our services for Federal, State and local govern- 
ments amount to less than 5% of our total revenues. 



QUESTION 8. Please state if your firm renders management or other 
advisory services in the following categories: 

A. Executive recruitment 

B. Marketing analysis 

C. Plant Layout 

D. Product analysis 

E. Actuarial services 

F. Federal advisory committees 



309 



RESPONSE We do provide assistance to clients in identi- 
fication and screening of candidates for executive and 
middle management positions. In this narrow sense, we 
provide services in the area of executive recruitment. 
We do not provide services that we would classify under 
the other categories specified. 



QUESTION 9' Please state the names and addresses of corporations 
listed on the New York Stock Exchange for which your firm is 
the independent auditor. 

RESPONSE The names and addresses of corporations listed on 

the New York Stock Exchange for which Haskins & Sells was 

the independent auditor at May 31, 1975 are listed in Exhibit B 



QUESTION 10. Please state the names and addresses of corporations 
listed on the American Stock Exchange for which your firm is 
the independent auditor. 

RESPONSE The names and addresses of corporations listed on 
the American Stock Exchange for which Haskins & Sells was the 
independent auditor at May 31, 1975 are listed in Exhibit C. 



Q UESTION 11. Please state the number of other publicly-held 

corporations for which your firm is the independent auditor, 
and the number of privately-held corporations for which your 
firm is the independent auditor. 

RESPONSE We have defined "other publicly-held corporations" 
to be those corporations which are required to file infor- 
mation with the Securities and Exchange Commission and are 
not listed on the New York or American Stock Exchanges. 
Haskins & Sells was the independent auditor for 369 such 
publicly-held companies at May 31, 1975- 

We have defined "privately-held corporations" as 
all of our audit clients that do not file information with 
the Securities and Exchange Commission. At May 31, 1975 
Haskins St Sells was the independent auditor for 4,798 such 
corporations . 



310 



QUESTION 12. Please indicate the total number of partners, 

principals and employees of your firm who are members of 
the American Institute of Certified Public Accountants. 

RESPONSE Our personnel records indicate that 1,235 partners 
and employees of Haskins & Sells were members of the American 
Institute of Certified Public Accountants at May 31, 1975. 
All partners are both CPAs and members of the AICPA. 



QUESTION 13- Please state if your firm has made financial con- 
tributions, directly or indirectly, to the Financial Account- 
ing Standards Board. If so, please indicate the amount of 
contributions made annually to date. 

RESPONSE Haskins & Sells has paid the following annual dues 
to the Accounting Research Association of the American In- 
stitute of Certified Public Accountants: 



1973 


$200,000 


197^ 


200,000 


1975 


200,000 



The Accounting Research Association contributes to the support 
of the Financial Accounting Standards Board. 



QUESTION 14. Please identify the departments, agencies, or sub- 
divisions of any Federal, State, municipal or other govern- 
ment authority for which your firm performed any services 
during 1975- 

RESPONSE Departments, agencies, and sub-divisions or author- 
ities of Federal, State, and municipal or other government 
authorities for which Haskins & Sells performed a significant 
amount of services during the fiscal year ended May 31 s 1975 
are listed in Exhibit D. 



QUESTION 15- Please identify the Federal departments, agencies, 

sub-divisions or authorities for which your firm has performed 
services during each year from January 1, 1970 through 
December 31, 197^. 

RESPONSE Departments, agencies, and sub-divisions or author- 
ities of the Federal government for which Haskins & Sells 
has performed a significant amount of services for the five 
fiscal years ending May 30, 1970 through June 1, 197^ are 
listed in Exhibit E. 



311 



QUESTION 16. Please state your firm's annual gross revenue 

from services performed for Federal departments, agencies, 
sub-divisions or authorities during each year from January 1, 
1970 to December 31, 1975- 

RESPONSE We estimate that the annual gross revenue from 
services performed for Federal departments, agencies, sub- 
divisions or authorities for the six years 1970-1975 was 
as follows: 

Fiscal Year Ended Gross Revenue 

May 30, 1970 $ 185,000 

May 29, 1971 5^0,000 

June 3, 1972 1,120,000 

June 3, 1973 1,165,000 

June 1, 197^ 920,000 

May 31, 1975 1,160,000 



QUESTION 17. Please state if your firm maintains a department, 
division, or office for the procurement of Federal, State 
and local government contracts. If so, please indicate the 
name of the person(s) in charge of said department, division 
or office, and the address of such office(s). 

RESPONSE Haskins & Sells does not maintain a department, 
division, or office for the procurement of Federal, State 
and local government contracts. Relationships with govern- 
ment entities are handled by the practice office respon- 
sible for performance of the services required. This means 
that relationships with Federal entities are largely the 
responsibility of individuals in our Washington, D.C. office 
who have experience in Federal activities and tend to spe- 
cialize in this aspect of our practice. 



312 

EXHIBITS 



RESPONSE TO DECEMBER 19, 1975 QUESTIONNAIRE 

OF 

UNITED STATES SENATE 

COMMITTEE ON 

GOVERNMENT OPERATIONS 

SUB-COMMITTEE ON REPORTS 

ACCOUNTING, AND MANAGEMENT 



(Staff note: Exhibit A, Haskins & Sells 197^-75 
"Directory for our Clients and for our Personnel , 
retained in committee files.) 



HASKINS & SELLS 
FEBRUARY, 1976 



313 



EXHIBIT B 



CLIENTS OF HASKINS & SELLS 
CORPORATIONS LISTED ON THE NEW YORK STOCK EXCHANGE 



NAME 



ADDRESS 



A.E. Staley Manufacturing Company 

A.J. Industries, Inc. 

Airco, Inc. 

Allied Supermarkets, Inc. 

Alpha Portland Industries, Inc. 

Ambac Industries, Inc. 

American Electric Power Company 

American Investment Company 

Amfac, Inc. 

Aristar, Inc. 

Arizona Public Service Company 

Armco Steel Corp. 

Atlantic City Electric Company 

Baker Oil Tools, Inc. 

Bank of New York Company, Inc. 

Bearings, Inc. 

The Bendix Corp. 

Beneficial Corp. 

Blue Bell, Inc. 

Braniff International Corp. 

Bunker Ramo Corp. 

Burlington Northern, Inc. 

Carolina Power & Light Company 

Castle & Cooke, Inc. 

Chris-Craft Industries, Inc. 

Citizens and Southern Realty Investors 

The Clorox Company 

Cluett Peabody & Company, Inc. 

Commonwealth Oil Refining Company 

Communications Satellite Corp. 

Continental Can Company, Inc. 

Copperweld Corp. 

Cox Broadcasting Corp. 

Dean Witter Organization, Inc. 

Deere & Company 

The Deltona Corp. 

Diamond International Corp. 

The Dow Chemical Company 

Duke Power Company 

Duquesne Light Company 



Decatur 111. 

Los Angeles Calif. 

Montvale N.J. 

Livonia Mich. 

Easton Pa. 

Carle Place N.Y. 

New York N.Y. 

Saint Louis Mo. 

Honolulu Hawaii 

Wilmington Del. 

Phoenix Ariz. 

Middletown Ohio 

Atlantic City N.J. 

Commerce Calif. 

New York N.Y. 

Cleveland Ohio 

Southfield Mich. 

Wilmington Del. 

Greensboro N.C. 

Dallas Texas 

Oak Brook 111. 

Saint Paul Minn. 

Raleigh N.C. 

Honolulu Hawaii 

New York N.Y. 

Atlanta Ga. 

Oakland Calif. 

New York N.Y. 

New York N.Y. 

Washington D.C. 

New York N.Y. 

Pittsburgh Pa. 

Atlanta Ga. 
San Francisco Calif. 

Moline 111. 

Miami Fla. 

New York N.Y. 

Midland Mich. . 

Charlotte N.C. 

Pittsburgh Pa. 



314 



EXHIBIT B 



CLIENTS OF HASKINS & SELLS 
CORPORATIONS LISTED ON THE NEW YORK STOCK EXCHANGE 



NAME 

Eckherd Drugs, Inc. 

Emhart Corp. 

Envirotech Corp. 

Equitable Life Mortgage and Realty Investors 

Falstaff Brewing Corp. 

Federal Paper Board Company, Inc. 

Filtrol Corp. 

Fischbach and Moore, Inc. 

Florida Power & Light Company 

Foremost-McKesson, Inc. 

GAF Corp. 

Garlock, Inc. 

General Motors Corp. 

The Great Atlantic & Pacific Tea Company 

Gulf Life Holding Company 

H.H. Robertson Company 

Hatteras Income Securities, Inc. 

Hobart Corp. 

Holly Sugar Corp. 

Homestake Mining Company 

Honeywell, Inc. 

Host International, Inc. 

Houdaille Industries, Inc. 

House of Fabrics, Inc. 

Household Finance Corp. 

Houston Lighting & Power Company 

Houston Natural Gas Corp. 

Hughes Tool Company 

Idaho Power Company 

Ideal Basic Industries, Inc. 

Indianapolis Power & Light Company 

Integon Corp. 

International Harvester Company 

Interstate Power Company 

J. P. Morgan & Company, Inc. 

J.W. Mays, Inc. 

Jantzen, Inc. 

Kaiser Aluminum & Chemical Corp. 

Kaufman and Broad, Inc. 

Kawecki Berylco Industries, Inc. 

Kimberly-Clark Corp. 

Laclede Gas Company 

Leaseway Transportation Corp. 



ADDRESS 




Charlotte 


N.C. 


Farmington 


Conn . 


Menlo Park 


Calif. 


Boston 


Mass. 


St. Louis 


Mo. 


Montvale 


N.J. 


Los Angeles 


Calif. 


New York 


N.Y. 


Miami 


Fla. 


San Francisco 


Calif. 


New York 


N.Y. 


Rochester 


N.Y. 


Detroit 


Mich. 


New York 


N.Y. 


Jacksonville 


Fla. 


Pittsburgh 


Pa. 


Charlotte 


N.C. 


Troy 


Ohio 


Colorado Spgs. 


Colo. 


San Francisco 


Calif. 


Minneapolis 


Minn. 


Santa Monica 


Calif. 


Buffalo 


N.Y. 


Sun Valley 


Calif. 


Chicago 


111. 


Houston 


Texas 


Houston 


Texas 


Houston 


Texas 


Boise 


Idaho 


Denver 


Colo. 


Indianapolis 


Ind. 


Winston-Salem 


N.C. 


Chicago 


111. 


Dubuque 


Iowa 


New York 


N.Y. 


Brooklyn 


N.Y. 


Portland 


Oregon 


Oakland 


Calif. 


Los Angeles 


Calif. 


Reading 


Pa. 


Neenah 


Wise. 


Saint Louis 


Mo. 


Cleveland 


Ohio 



315 



EXHIBIT B 



CLIENTS OF HASKINS & SELLS 
CORPORATIONS LISTED ON THE NEW YORK STOCK EXCHANGE 



NAME 

Liggett & Myers, Inc. 

Lone Star Gas Company 

Longs Drug Stores, Inc. 

Lubrizol Corp. 

M. Lowenstein & Sons, Inc. 

Macmillan, Inc. 

Magic Chef, Inc. 

Manufacturers Hanover Corp. 

Mapco, Inc. 

McCrory Corp. 

Merrill Lynch & Company, Inc. 

Middle South Utilities, Inc. 

Minnesota Mining and Manufacturing Company 

Monogram Industries, Inc. 

Monsanto Company 

National Airlines, Inc. 

Norlin Corp. 

Norris Industries, Inc. 

Northern States Power Company 

Norton Simon, Inc. 

Ogden Corp. 

Omark Industries, Inc. 

Oneida Ltd. 

Pacific Gas and Electric Company 

Pacific Lighting Corp. 

Pacific Pov/er & Light Company 

Palm Beach Company 

Penn Central Company 

Pennsylvania Power & Light Company 

Philips Industries, Inc. 

Piedmont Natural Gas Company 

PPG Industries, Inc. 

Procter & Gamble Company 

Public Service Electric and Gas Company 

Puerto Rican Cement Company, Inc. 

Rapid-American Corp. 

Rexham Corp. 

Rio Grande Industries, Inc. 

Rockwell International Corp. 

Sabine Royalty Corp. 

San Diego Gas & Electric Company 

Schering-Plough Corp. 

SCM Corp. 

Seaboard Coast Line Industries 



ADDRESS 




Durham 


N.C. 


Dallas 


Texas 


Walnut Creek 


Calif. 


Wickliffe 


Ohio 


New York 


N.Y. 


New York 


N.Y. 


Cleveland 


Tenn. 


Dover 


Del. 


Tulsa 


Okla. 


New York 


N.Y. 


New York 


N.Y. 


New Orleans 


La. 


Saint Paul 


Minn. 


Santa Monica 


Calif. 


Saint Louis 


Mo. 


Miami 


Fla. 


New York 


N.Y. 


Los Angeles 


Calif. 


Minneapolis 


-Minn. 


New York 


N.Y. 


New York 


N.Y. 


Portland 


Oregon 


Oneida 


N.Y. 


San Francisco 


Calif. 


Los Angeles 


Calif. 


Portland 


Oregon 


Cincinnati 


Ohio 


Philadelphia 


Pa. 


Allentown 


Pa. 


Dayton 


Ohio 


Charlotte 


N.C. 


Pittsburgh 


Pa. 


Cincinnati 


Ohio 


Newark 


N.J. 


San Juan 


Puerto Rico 


New York 


N.Y. 


New York 


N.Y. 


Denver 


Colo. 


El Segundo 


Calif. 


Dallas 


Texas 


San Diego 


Calif. 


Kenilworth 


N.J. 


New York 


N.Y. 


Richmond 


Va. 



67-159 O - 77 - 22 



316 



EXHIBIT B 



CLIENTS OF HASKINS & SELL S 
CORPORATIONS LISTED ON THE NEW YORK STOCK EXCHANGE 



NAME 



ADDRESS 



Sedco, Inc. 

The Signal Companies, Inc. 

Soo Line Railroad Company 

South Carolina Electric & Gas Company 

South Jersey Industries, Inc. 

Southeast Banking Corp. 

Southern Pacific Company 

Springs Mills, Inc. 

St. Joe Minerals Corp. 

St. Regis Paper Company 

Standex International Corp. 

Stauffer Chemical Company 

Tektronix, Inc. 

Texfi Industries, Inc. 

Trans World Airlines, Inc. 

Transcon Lines 

Tri -Continental 

Tucson Gas & Electric Aompany 

Union Camp Corp. 

Union Pacific Corp. 

Uniroyal, Inc. 

United States Leasing International, 

Utah Power & Light Company 

Vetco Offshore Industries, Inc. 

Vulcan Materials Company 

Washington Water Power Company 

Watkins-Johnson Company 

Wells Rich Greene, Inc. 

Wometco Enterprises, Inc. 

The Wurlitzer Company 



Inc 



Dallas Texas 

Beverly Hills Calif. 

Minneapolis Minn. 

Columbia S.C. 

Folsom N.J. 

Miami Fla. 

San Francisco Calif. 

Fort Mill S.C. 

New York N.Y. 

New York N.Y. 

Andover Mass. 

Westport Conn. 

Beaverton Oregon 

Greensboro N.C. 

New York N.Y. 

El Segundo Calif. 

New York N.Y. 

Tucson Ariz. 

Wayne N.J. 

New York N.Y. 

New York N.Y. 

San Francisco Calif. 
Salt Lake City Utah 

Ventura Calif. 

Birmingham Ala. 

Spokane Wash. 

Palo Alto Calif. 

New York N.Y. 

Miami Fla. 

Chicago 111. 



317 



EXHIBIT C 



CLIENTS OF HASKINS & SELLS 
CORPORATIONS LISTED ON THE AMERICAN STOCK EXCHANGE 



NAME 

Aiken Industries, Inc. 

Ajax Magnethermic Corp. 

American Business Products, Inc. 

American Manufacturing Company 

American Technical Industries 

Ampex Corp. 

Armac Enterprises 

Associated Mortgage Investors 

Astrodata, Inc. 

Atco Industries, Inc. 

Augat , Inc . 

Automated Building Components 

Automatic Radio Mfg. Company 

Automatic Switch Company 

Aydin Corp. 

Behavioral Research Laboratories, Inc 

Benrus Corp. 

Bergen Brunswig Corp. 

Bic Pen Corp. 

Bradford Computer & Systems, Inc. 

Braniff Airways, Inc. 

Breeze Corporations, Inc. 

California Life Corp. 

California Portland Cement Company 

Cellu-Craft, Inc. 

Clarkson Industries, Inc. 

Computer Instruments Corp. 

Cordon International Corp. 

Cox Cable Communications, Inc. 

Delta Corporation of America 

Deseret Pharmaceutical Company 

Dial Financial Corp. 

Digicon, Inc. 

Elco Industries 

Electrographic Corp. 

Empress International Ltd. 

Galaxy Carpet Mills, Inc. 

The Golden Cycle Corp. 



ADDRESS 




New York 


N.Y. 


Warren 


Ohio 


Atlanta 


Ga. 


Brooklyn 


N.Y. 


Mount Vernon 


N.Y. 


Redwood 


Calif 


Chicago 


111. 


Coral Gables 


Fla. 


Anaheim 


Calif 


Stratford 


Conn. 


Attleboro 


Mass . 


Miami 


Fla. 


Melrose 


Mass. 


Florham Park 


N.J. 


Fort Washington 


Pa. 


Menlo Park 


Calif 


Ridgefield 


Conn. 


Los Angeles 


Calif 


Milford 


Conn. 


New York 


N.Y. 


Dallas 


Texas 


Union 


N.J. 


Los Angeles 


Calif 


Los Angeles 


Calif 


New Hyde Park 


N.Y. 


New York 


N.Y. 


Hempstead 


N.Y. 


Los Angeles 


Calif 


Atlanta 


Ga. 


Miami 


Fla. 


Sandy 


Utah 


Des Moines 


Iowa 


Houston 


Texas 


Rockford 


111. 


Chicago 


111. 


Lake Success 


N.Y. 


Elk Grove Villa 


111. 


Colorado Spgs. 


Colo. 



318 



EXHIBIT C 



CLIENTS OF HASKINS & SELLS 
CORPORATIONS LISTED ON THE AMERICAN STOCK EXCHANGE 



NAME 



ADDRESS 



Hawaiian Airlines, Inc. 

Horn & Hardart Company 

Hospital Mortgage Group 

Hudson General Corp. 

IPCO Hospital Supply Corp. 

John H. Harland Company 

Kansas Gas & Electric Company 

Lee Pharmaceuticals 

Loew's Theatres, Inc. 

Maine Public Service Company 

Maul Bros. , Inc . 

The Midland Company 

Mount Vernon Mills, Inc. 

MPS International Corp. 

National Power & Light 

The New York Times Company 

Overseas Securities Company, Inc. 

P.H. Glatfelter Company 

Penn Engineering & Manufacturing Corp 

Permaneer Corp. 

Pratt & Lambert, Inc. 

Prentice-Hall, Inc. 

Presidential Realty Corp. 

Rossmoor Corp. 

Rowan Companies, Inc. 

Ruddick Corp. 

Sabine Royalty Corp. 

Saturn Airways, Inc. 

Schenuit Industries, Inc. 

Sears Industries, Inc. 

Shaer Shoe Corp. 

Sorg Paper Company 

Southland Royalty Company 

Spencer Foods, Inc. 

Standard-Coosa-Thatcher Company 

Standard Shares, Inc. 

Starrett Housing Corp. 

Syntex Corp. 

Texas Power & Light Company 

United Companies Financial Corp. 



Honolulu 

New York 

North Miami 

Great Neck 

Valhalla 

Atlanta 

Wichita 

South El Monte 

New York 

Presque Isle 

Millville 

Cincinnati 

Greenville 

New York 

Raleigh 

New York 

New York 

Spring Grove 

Doylestown 

Maryland Height 

Buffalo 

Englewood Cliff 

White Plains 

Laguna Hills 

Houston 

Charlotte 

Dallas 

Oakland 

Baltimore 

New York 

Manchester 

Middletown 

Fort Worth 

Spencer 

Chattanooga 

New York 

New York 

Panama City 

Dallas 

Baton Rouge 



Hawaii 

N.Y. 

Fla. 

N.Y. 

N.Y. 

Ga. 

Kans . 

Calif. 

N.Y. 

Maine 

N.J. 

Ohio 

S.C. 

N.Y. 

N.C. 

N.Y. 

N.Y. 

Pa. 

Pa. 

Mo. 

N.Y. 

N.J. 

N.Y. 

Calif. 

Texas 

N.C. 

Texas 

Calif. 

Md. 

N.Y. 

N.H. 

Ohio 

Texas 

Iowa 

Tenn. 

N.Y. 

N.Y. 

Panama 

Texas 

La. 



319 



EXHIBIT C 



CLIENTS OF HASKINS & SELLS 
CORPORATIONS LISTED ON THE AMERICAN STOCK EXCHANGE 



NAME 

Wadell Equipment Company, Inc 
Welldo Enterprises, Inc. 
Western Financial Corp. 
Wichita Industries, Inc. 
Willcox & Gibbs, Inc. 
Wrather Corp. 
WUI, Inc. 

Yates Industries, Inc. 
Zero Manufacturing Company 
Zimmer Homes Corp. 



ADDRESS 




Edison 


N.J. 


Waynesville 


N.C. 


Phoenix 


Ariz . 


New York 


N.Y. 


New York 


N.Y. 


Beverly Hills 


Calif 


New York 


N.Y. 


Burdentown 


N.J. 


Burbank 


Calif 



Pompano Beach 



Fla. 



320 



EXHIBIT D 



CLIENTS OF HASKINS & SELLS 



FEDERAL, STATE, MUNICIPAL DEPARTMENTS, AGENCIES OR SUB-DIVISIONS 

FOR WHICH A SIGNIFICANT AMOUNT OF SERVICES WERE PERFORMED 
DURING FISCAL YEAR ENDED MAY 31, 1975 



FEDERAL 



Federal Energy Administration 

Federal Savings and Loan Insurance Corporation 

General Services Administration 

United States Department of the Navy 

Comptroller of the Currency 

STATE 

Arizona State Retirement Systems 

Colorado Department of Natural Resources 

Colorado Department of Social Services - Division of Public Welfare 

Connecticut Development Authority 

Connecticut Resources Recovery Authority 

Connecticut, State of - State Welfare Department 

Department of Business Regulations - Florida 

State of Illinois - Department of Financial Institutions 

State of Illinois - Office of General Auditors 

Department of Audits - State of Illinois 

Department of Social & Healing Services - State of Washington 

Dormitory Authority of the State of New York 

State of Hawaii - Hawaii Housing Authority 

Maryland Health Service Cost Review Commission 

Maryland Port Administration 

Michigan Bureau of State Lottery 

New Jersey State Lottery Commission 

Office of Accounting Services - Washington 

Ohio Department of Public Welfare 

Ohio Department of Administrative Services 

City of St. Clair Shores - Michigan 

San Juan Superior Court - Calderon Case - Puerto Rico 

State of Rhode Island Lottery Study Committee 

Transportation Research Center of Ohio 

Trinity River Authority of Texas 

State of Utah Division of Corrections 

MUNICIPAL 



Borough of Ambler Municipality - Pennsylvania 
Borough of Audubon Municipality - New Jersey 
Borough of Berlin Municipality - New Jersey 
City of Cape May - New Jersey 
City of Chandler - Arizona 



321 



EXHIBIT D 



CLIENTS OF HASKINS & SELLS 

FEDERAL, STATE, MUNICIPAL DEPARTMENTS, AGENCIES OR SUB-DIVISIONS 

FOR WHICH A SIGNIFICANT AMOUNT OF SERVICES WERE PERFORMED 
DURING FISCAL YEAR ENDED MAY 31, 1975 

MUNICIPAL (Continued) 

City of Charlotte - Mecklenburg Board of Education - North Carolina 

Chatham County - Georgia 

City of Cincinnati (Municipality) - Ohio 

Township of Cinnaminson - Municipality - New Jersey 

City of Bountiful Employees Retirement Fund - Utah 

City of Alexandria Louisiana 

City of Globe - Arizona 

City of Dallas - Texas 

City of Dallas, Texas, HUD Grant Fund 

Township of Delran Municipality - New Jersey 

Deptford Township Municipality - New Jersey 

Douglas County Health Department - Nebraska 

Douglas County - Nebraska 

Town of East Hartford - Bd. of Education - Connecticut 

Town of Fairfield - Connecticut 

Fairfield Township Municipality - New Jersey 

Township of Florence Municipality - New Jersey 

Fort Bend County - Texas 

Grand Jury of Alameda of California 

Township of Greenwich (Gloucester County) - New Jersey 

Gwinnett County Water & Sewage Authority - Georgia 

Haddon Heights Borough Municipality - New Jersey 

County of Hawaii 

City of Hollywood - Florida 

Housing Authority of the City of Indianapolis - Indiana 

Howard County - Maryland 

Independent School District No. 196 - Minnesota 

Board of Commissioners of Kankakee County-Illinois 

Borough of Lansdale - Pennsylvania 

City of Leesburg, Florida 

Borough of Medford Lakes Municipality - New Jersey 

Township of Medford Municipality - New Jersey 

City of Mesquite - Texas 

Metropolitan Dade County - Florida 

Department of Water Sewage - Tennessee 

Metropolitan Government Nashville & Davidson County - Tennessee 

Metro Action Commission - Tennessee 

Township of Middle Municipality - New Jersey 

Monroe Township - New Jersey 

Township of Moorestown Municipality - New Jersey 

Township of Mount Laurel Municipality - New Jersey 

County of Napa, California 



322 



EXHIBIT D 



CLIENTS OF HASKINS & SELLS 

FEDERAL, STATE, MUNICIPAL DEPARTMENTS, AGENCIES OR SUB-DIVISIONS 

FOR WHICH A SIGNIFICANT AMOUNT OF SERVICES WERE PERFORMED 
DURING FISCAL YEAR ENDED MAY 31, 1975 

MUNICIPAL - (Continued ) 

City of New Britain-Connecticut 

Township of New Hanover Municipality - New Jersey 

Township of North Hanover Municipality - New Jersey 

Borough of Palmyra Municipality - New Jersey 

City of Philadelphia - Pennsylvania 

Borough of Pitman Municipality - New Jersey 

City of Pontiac - Pontiac General Hospital Fund - Michigan 

Borough of Riverton - New Jersey 

City of Salem Municipality - New Jersey 

Salt Lake City Corporation - Utah 

City of San Antonio - Model Cities Program - Texas 

Town of Scituate - Massachusetts 

Town of Seymour - Connecticut 

City of Simi Valley - California 

Town of Stratford - Connecticut 

Township of Upper Deerfield Municipality - New Jersey 

City of Vernon - California 

Washington County - Minnesota 

Township of West Deptford Municipality - New Jersey 

Westchester County Medical Center - Grassland Hospital - New York 

Town of Westport - Connecticut 

Borough of Wildwood Crest - New Jersey 

OTHER 

Government of American Samoa 
District of Columbia Public Service 



Note - 

The above list includes those entities for which Haskins & Sells 
performed a significant amount of services during the fiscal 
year ended May 31, 1975, with "significant" defined as engage- 
ments aggregating fees of $10,000 or more. 



323 



EXHIBIT E 



CLIENTS OF HASKINS & SELLS 

FEDERAL DEPARTMENTS, AGENCIES OR SUB-DIVISIONS 
FOR WHICH A SIGNIFICANT AMOUNT OF SERVICES WERE PERFORMED FOR 
THE FIVE FISCAL YEARS ENDING JUNE 1, 197^ 



FISCAL YEAR ENDED MAY 30 , 1970 

United States Department of Navy 

FISCAL YEAR ENDED MAY 29, 1971 

United States Department of Navy 

FISCAL YEAR ENDED JUNE 3, 1972 

Maui Economic Opportunity 
United States Department of Navy 

FISCAL YEAR ENDED JUNE 2, 1973 

Department of Health, Education and Welfare 
Price Commission Office of Administration 
United States Department of Navy 
Maui Economic Opportunity 
General Services Administration 

FISCAL YEAR ENDED JUNE 1, 197^ 

Federal Home Loan Bank Board Consolidated 

Securities Fund 
United States Department of Navy 
Comptroller of the Currency 



Note - 

The above list includes those entities for which Haskins & Sells 
performed a significant amount of services during the fiscal 
year ended May 31, 1975, with "significant" defined as engage- 
ments aggregating fees of $10,000 or more. 



324 



Peat, Marwick, Mitchell & Co. 

CERTIFIED PUBLIC ACCOUNTANTS 

3-45 PARK AVENUE 

NEW YORK, NEW YORK 10022 



Walter E.Hanson 

SENIOR PARTNER 



January 23, 1976 



Senator Lee Metcalf 

United States Senate 

Committee on Government Operations 

Washington, D. C. 20510 

Dear Senator Metcalf: 

In reply to your request of December 19, 1975, I am 
pleased to enclose the answers to the questionnaire 
enclosed with that letter. We are pleased to cooperate 
with your committee in completing this questionnaire, 
and if there are any clarifying questions, please do 
not hesitate to let me know. 



Sincerely yours, 



WEH:ebs 
Enclosure 




325 



PEAT, MARWICK, MITCHELL & CO. 
345 Park Avenue 
New York, New York 10022 



Questionnaire - Subcommittee on 
Reports, Accounting and Management 



1) 100 offices 

2) 42 states + Guam + Puerto Rico + Washington, D.C. = 45 

3) 199 foreign offices 

4) 791 partners 

5) 90 principals 

6) 8,277 employees excluding partners and principals 



7) a- 67.7% 
b- 21.4 
c- 10.9 
100.0% 



d- 1.0% 

, y These amounts are included in 7a, b, and c 



8) a-f 

Peat, Marwick, Mitchell & Co. renders management or other advisory services 
in all the listed categories. 

9) 220 clients on the New York Stock Exchange - listing enclosed 

10) 115 clients on the American Stock Exchange - listing enclosed 

11) a- 745 other publicly-held corporations not on the New York Stock Exchange 

or the American Stock Exchange 
b- 22,500 non-public clients 



326 



Questionnaire - Subcommittee on 
Reports, Accounting and Management 



12) Not known - AICPA membership is on an individual basis 

13) The Firm contributes $200,000 to the Financial Accounting Standards Board 
each year. 

14) The following is a listing of the major categories of Federal departments 
and agencies for which PMM&Co. performed services in 1975. In addition, 
PMM&Co. performed services for approximately 1,500 clients categorized as 
"state, municipal or other government authority": 

Department of the Army 

Department of Justice 

Department of the Navy 

Department of Transportation 

Environmental Protection Administration 

Federal Highway Administration 

Federal Home Loan Board 

Federal Railroad Administration 

General Accounting Office 

General Services Administration 

Health, Education and Welfare 

Housing and Urban Development 

National Aeronautics and Space Administration 

National Highway Traffic Safety Administration 

National Science Foundation 

Office of Alien Property 

Office of Economic Opportunity 

Office of Management and Budget 

United States Price Commission 



15) Same listing as question #14 

16) Amounts are not segregated from Firm totals and therefore not obtainable 

17) None in existence 



327 



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335 



ABRAHAM R1BICOFF. CONN.. CHAIRMAN SUBCOMMITTEE! 

JOHN L. MC CLELLAN, ARK. CHARLFB H. PERCY, ILL. LEE METCALF, MONT., CHAIRMAN 

HENRY M. JACKSON, WASH. JACOB K. JAV1TS. N.Y. JOHN L. MC CLELLAN, ARK. BILL BROCK, TENN. 

EDMUND S. MUSKIE, MAINE WILLIAM V. ROTH, JR., DEL. EDMUND S. MUSKIE, MAINE 

LEE METCALF, MONT. BILL BROCK, TENN. SAM NUNN, OA. 

JAMES B. ALLEN, ALA. LOWELL P. WElCKER, JR., CONN. JOHN GLENN, OHIO 

LAWTON CHILES, FLA. 

SAM NUNN OA. VIC *ON*MER. STAFF DIRECTOR 

JOHN GLENN OHIO ■* *» N *LOW TURNER, CHIEF COUNSEL 

Ml RUSSELL BUILDING 



QlCnticb stales J&cnaie 

COMMITTEE ON 

GOVERNMENT OPERATIONS 

SUBCOMMITTEE ON REPORTS. 

ACCOUNTING. AND MANAGEMENT 

(PURCUAWr TO SEC. 7. S. RES. M3, WTH CONGRESS) 

WASHINGTON. O.C 20510 



30 January 1976 



(202) 224-1474 



Mr. Walter E. Hanson 

Senior Partner 

Peat, Marwick, Mitchell {j Company 

34 5 Park Avenue 

New York, New York 10022 

Dear Mr. Hanson: 

I was pleased to receive your response to this sub- 
committee's accounting questionnaire on 23 January. There 
were some ommissions and discrepancies which I hope you 
will clarify. 

The answer given for question 16 concerning the amount 
of revenues your firm has received from each of the Federal 
agencies listed in response to questions 14 and 15 was: 
"Amounts are not segregated from Firm totals and therefore 
not obtainable." 

In view of the fact that your firm is a recognized 
expert in record-keeping for the companies retaining Peat, 
Marwick, Mitchell § Company as independent auditor, I had 
hoped that the firm's own records would be kept in suf- 
ficient detail to locate this information. Records at other 
accounting firms are kept in a manner which allows easy computer 
retrieval of information on government clients. 

In order for this subcommittee to evaluate the re- 
lationship between Federal agencies and accounting firms, it 
is necessary that we have data on the amount of Federal 
money which is being spent by each agency on accounting 
firm contracts. It would be most helpful to the subcommittee 
if your staff would exert some extra effort in retrieving 
this information for us. 



336 



Mr. Walter E. Hanson 
30 January 1976 
Page Two 

Your response also stated that among the major categories 
of Federal departments and agencies for which your company 
performed services in 1975 and previous years were the 
Price Commission, the Office of Alien Property and the 
Office of Economic Opportunity. The Price Commission was 
terminated by Executive Order # 11695 on 11 January, 1973. 
The Office of Alien Property was terminated, by Executive 
Order # 11281 on 13 May, 1966, effective 30 June, 1966. 
(The foreign fund control section was transferred to the 
Office of Foreign Assets Control in the Treasury Department 
and other functions to the civil division of the Department 
of Justice.) All OEO programs except three were transferred 
by administrative action to three major departments on 6 July, 
1973 and the three remaining programs (Community Action, 
Economic Development and Legal Services) were transferred 
to the Community Services Administration by act of 4 January, 
1975 (88 Stat. 2310; 42 U.S.C. 2941). Please explain your 
statement that Peat, Marwick performed services for agencies 
which no longer existed. 

Your cooperation is appreciated. 

Very truly yours , 

ORIGINAL SIGNED at 
LEE METCALF, 



337 



Peat, Marwick, Mitchell & Co. 

CERTIFIED PUBLIC ACCOUNTANTS 

3-45 PARK AVENUE 

NEW YORK. NEW YORK 10022 



Walter E.Hanson 

SENIOR PARTNER 



March 8, 1976 



Senator Lee Metcalf 
United States Senate 
Committee on Government 

Operations 
Washington, D. C. 20510 

Dear Senator Metcalf: 

In your letter of January 30, 1976, you requested additional 
information in connection with the Committee on Government 
Operations. We pride ourselves in having a well-managed firm 
and have developed our accounting and management information 
system to provide the data necessary for making effective 
management decisions. As such, we avoid developing information 
which has no management value to us. The information you 
requested regarding annual gross revenues from services performed 
for Federal departments, etc. falls into this latter category. 
To cooperate with your committee, however, we have expended 
substantial personnel and computer time in the development 
of this information specifically for the Senate subcommittee. 

In response to question 16, the annual gross revenues from 
services performed for Federal departments, etc. were as follows: 

Period Amount 



Year ended June 30, 1975 $4,020,000. 

" 1974 3,250,000. 

" 1973 2,970,000. 

" 1972 3,540,000. 

" 1971 4,310,000. 

While you requested this information on a calendar year basis, 
the above data has been developed on our regular June 30 fiscal 
year. We do not consider it economically feasible to restate 
this information on a calendar basis. 



338 



In addition to the information regarding revenues, you also 
requested clarification regarding services performed for 
agencies which no longer exist. Under the PMM&Co. accounting 
system, a client is considered an active client until all 
phases of an engagement are completed. Consequently, even 
if no additional services were performed, a client is 
considered active if any uncollected billings remain out- 
standing. In the case of the Price Commission and the 
Office of Economic Opportunity, no additional services were 
performed subsequent to 1973. However, final billings were 
collected subsequent to that time. For example, a 1972 
billing to 0E0 was not collected until June 27, 1975 due 
to internal delays brought about by the wind-down of their 
affairs. 

With respect to the Office of Alien Property, we are still 
performing services for that unit as a part of the Department 
of Justice. This unit is reflected in our records as the 
Office of Alien Property to delineate it from other engage- 
ments performed for the Department of Justice. This treatment 
is consistent with that used to identify a subsidiary from the 
parent company in the corporate environment. 

We trust this will provide the committee with the information 
necessary to complete its deliberations. 

Very truly yours, / 

; 



f A 



s 



r 



WEH:EWR 



339 




1251 AVENUE CF THE AMERICAS NEW YORK NEW YORK 10020 

212-489-8900 



December 30, 1975 



The Honorable Lee Metcalf 

Chairman, Subcommittee on 

Reports, Accounting, and Management 

United States Senate 

151 Russell Building 

Washington, D. C. 20510 

My dear Senator Metcalf: 

This is to acknowledge receipt of your letter of December 19 
enclosing a questionnaire concerning certain of the activities of 
my firm. The firm of Price Waterhouse & Co. is pleased to 
cooperate and accordingly we have already commenced a study of the 
questionnaire. Unfortunately, some of the information called for 
will require extensive analysis of our records. As soon as we have 
made a review of our records for the purpose of determining the 
feasibility of providing answers to your questionnaire, we will be 
in touch with you. 

I would like to take this opportunity to comment on one matter 
of concern to me. In the third paragraph of your letter you state: 

"The SEC has formalized this dependence in Accounting Series 
Release No. 150 which states that the Commission will gen- 
erally respect and endorse the rulings of the Financial 
Accounting Standards Board - a body established and largely 
funded by the accounting profession to set accounting 
standards for the profession ." 

I respectfully suggest that the underscored portion of the foregoing 
quoted material displays less than a full understanding as to the 
nature of the FASB. I think I can speak with some modest authority 
on this subject since I was a member of the Wheat Committee which 
studied the establishment of accounting standards and recommended 
the formation of the FASB. In addition, I have been, since its 
formation, a Trustee of the Financial Accounting Foundation, of 
which the FASB is a part . 



340 



The Honorable Lee Metcalf - 2 - December 30, 1975 



In the first place, it is probably not quite correct to say 
that the FASB was established by the accounting profession. The 
fact is that the FASB is an independent body in the private sector 
which is established under the auspices of no less than five 
sponsoring organizations, of which the organized accounting pro- 
fession is only one. Those five sponsoring organizations are: 

American Accounting Association 
American Institute of Certified 

Public Accountants 
Financial Executives Institute 
Financial Analysts Federation 
National Association of Accountants 

It seems to me with such broadly based sponsorship one would not 
wish to imply that the FASB is established by the accounting pro- 
fession itself. 

Secondly, I respectfully point out that the statement to the 
effect that the Financial Accounting Standards Board is largely 
funded by the accounting profession is not borne out by the facts. 
I believe that you will find that only approximately one-half of 
the funding of the FASB comes from the accounting profession and 
the other half comes from some 1,300 companies in the industrial 
sector, plus such organizations as the New York Stock Exchange. 
In addition, financial support is received from the American 
Accounting Association, an organization which mainly consists of 
academic accountants; the NAA, which consists mainly of accountants 
in industry; and the FAF, which, of course, represents professional 
financial analysts. 

One further thought. The material quoted above states that 
the FASB will set accounting standards for the profession. I 
believe that this is a somewhat truncated view of its role since 
fundamentally the FASB is charged with the establishment of account- 
ing standards to be followed by issuers of financial statements , 
that is, all of industry. It is well established that the primary 
responsibility for the fairness of financial statements and their 
compliance with FASB standards rests with the issuers thereof and 
that the role of the accounting profession is limited to examining 
those statements and expressing an independent opinion thereon. 



\ 



\ T atcriiousc 



341 



The Honorable Lee Metcalf 



3 - 



December 30, 1975 



In that sense the accounting profession, in carrying out the 
attest function, performs an important but clearly oversight role . 
It would perhaps be a better statement of the facts to say that 
the primary role of the FASB is to establish financial accounting 
standards for the guidance of issuers of financial statements - it 
being understood that such standards are also for the guidance of 
the accounting profession in carrying out its attest function with 
respect to such statements . 

I hope my comments may be helpful to you and your subcommittee. 

Sincerely, 




lT "'alcrhouse 9 J. _•:; 



342 




ice 
terhouse 



1251 AVENUE OF THE AMERICAS NEW YORK. NEW YORK 10020 

212-489-8900 



February 18, 1976 



The Honorable Lee Metcalf 
Chairman, Subcommittee on 
Reports, Accounting and Management 
United States Senate 
151 Russell Building 
Washington, D. C. 20510 

My dear Senator Metcalf: 

In accordance with the request contained in your 

letter of December 19, 1975, I enclose the answers to 

a questionnaire which accompanied your letter. 

Very truly yours , 





343 



ANSWERS TO QUESTIONNAIRE SUBMITTED 

TO PRICE WATERHOUSE & CO. (PW) BY THE 

REPORTS, ACCOUNTING AND MANAGEMENT 

SUBCOMMITTEE OF THE SENATE 

COMMITTEE ON GOVERNMENT 

OPERATIONS 



1. Please state the number of offices which your firm maintains 
within the United States (If more than one partnership, corpora- 
tion or other entity exists in the United States, please furnish 
all names and answer subsequent questions accordingly.) 

PW has 67 offices in the United States . 

2. Please indicate the number of states, territories or possessions 
of the United States in which your firm maintains an office or 
affiliated office. 

PW has offices in 32 states and in Puerto Rico. 

3. Please state the number of cities outside the United States in 
which your firm maintains offices or has an affiliation. 

PW or its affiliates have offices in 203 cities 
outside the United States. 

4. Please state the number of partners in your firm located in the 
United States (include only certified public accountants) . 

PW has 348 partners (CPAs) in the United States. 

5. Please state the number of principals located in your offices in 
the United States who are not certified public accountants. 

PW has 18 principals (almost entirely Management 
Advisory Services personnel) located in offices in 
the United States. (These people are not CPAs, but 
meet all other standards required for partners.) 

6. Please state the total number of employees of your firm within 
the United States, excluding only partners and principals. 

PW has 5,933 employees within the United States 
exclusive of partners and principals (at January 
31, 1976). Of these, 4,654 are professionals and 
1,279 are nonprofessionals such as secretaries, 
receptionists, file clerks, etc. and other admin- 
istrative support personnel. 



344 



7. Please indicate the approximate percentage of total revenues for 
services performed by your firm in the following categories: 

A. Auditing and accounting 

B. Tax services 

C. Management advisory services including executive, 

recruitment, product analysis, marketing analysis, 
and plant layout 

D. Actuarial services 

E. Services performed for Federal, State or local 

governments 

F. Other 

Percentage of 
total revenues 

A. Auditing and accounting 76% 

B. Tax services 16 

C. Management advisory services* 6 

D. Actuarial services 

E. Services performed for Federal 

State or local governments 2 

F. Other services - 

100% 

*Does not include product analysis , 
marketing analysis, and plant layout. 
(The firm does not render these services.) 

8. Please state if your firm renders management or other advisory 
services in the following categories: 

A. Executive recruitment 

B. Marketing analysis 

C. Plant layout 

D. Product analysis 

E. Actuarial services 

F. Federal advisory committees 

PW renders management services in executive recruitment 
(limited to accounting and financially oriented adminis- 
trative positions) . PW does no work in the areas of 
market analysis, plant layout, product analysis, actu- 
arial services or federal advisory committees . (In the 
context of the question, we assume that "federal advisory 
committees" refers to client services only.) 

9. Please state the name and address of corporations listed on the 
New York Stock Exchange for which your firm is the independent 
auditor. 

A list of PW's NYSE clients is attached as Exhibit A. 



345 



10. Please state the name and address of corporations listed on the 
American Stock Exchange for which your firm is the independent 
auditor . 

A list of PW's AMEX clients is attached as Exhibit B. 

11. Please state the number of other publicly-held corporations for 
which your firm is the independent auditor, and the number of 
privately held corporations for which your firm is the inde- 
pendent auditor. 

PW is the independent auditor for 523 other publicly- 
held (SEC registered) companies. PW is the inde- 
pendent auditor for 4,787 privately-held corporations. 
(Does not include nonprofit corporations nor clients 
that are not corporations . ) 

12. Please indicate the total number of partners, principals and 
employees of your firm who are members of the American Institute 
of Certified Public Accountants. 

We estimate that at December 31, 1975, 2,200 PW partners 
and staff were members of the American Institute of 
Certified Public Accountants. 

13. Please state if your firm has made financial contributions, 
directly or indirectly, to the Financial Accounting Standards 
Board. If so, please indicate the amount of contributions made 
annually to date. 

PW made contributions of $200,000 to the Financial 
Accounting Standards Board in 1973, 1974 and 1975 
(total $600,000 to date). 

14. Please identify the departments, agencies or subdivisions of 
any federal, state, municipal or other government authority for 
which your firm performed any services during 1975. 

A list of the departments, agencies or subdivisions 
of federal, state and local governments for which PW 
rendered services in the year ended June 30, 1975 is 
attached as Exhibit C. (Our records are maintained 
on a June 30 fiscal year.) 

15. Please identify the federal departments, agencies, subdivisions 
or authorities for which your firm has performed services during 
each year from January 1, 1970 through December 31, 1974. 

A list showing federal departments, agencies, sub- 
divisions and authorities for which PW performed 
services during each year from June 30, 1970 through 
June 30, 1975 is attached as Exhibit D. 

16. Please state your firm's annual gross revenue from services per- 
formed for Federal departments, agencies, subdivisions or 
authorities during each year from January 1, 1970 to December 
31, 1975. 



346 



Annual gross revenues from the Federal Government 
for years 1970 through 1975 follow: 



Year ended 


June 


30, 


1970 


it it 


ii 




1971 


ii n 


ti 




1972 


ii ii 


■ i 




1973 


ii u 


1 1 




1974 


ii ii 


ii 




1975 



$ 



Six months ended December 31, 1975 



2,000 
52,000 
69,000 
258,000 
172,000 
320,000 
385,000 



17. Please state if your firm maintains a department, division or 
office for the procurement of Federal, State and local govern- 
ment contracts. If so, please indicate the name of the person(s) 
in charge of said department, division or office, and address 
of such office(s). 

PW maintains an Office of Government Services. This 
office, which is a part of the firmwide function of our 
National Office, is directly responsible for the co- 
ordination of our services to clients which involve 
direct relationships with government agencies and 
departments. Similarly, the Office of Government 
Services is responsible for the direction and coordina- 
tion of our services to government at all levels. 
Mr. Roscoe L. Egger, Jr. is partner in charge of the 
office. Mr. Paul B. Goodstat, a principal, is in charge 
of the Federal government activity. Mr. Benton B. Warder, 
a partner, is in charge of the state and local government 
activity. The address of the office is 1801 K Street, 
N.W., Washington, D.C. 20006. 



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a 


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cr 


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cr 


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3 


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cr 


cr 


UI 


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to 


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cr 


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cr 


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359 



EXHIBIT A 
Page 13 



CM 


CO 


w— 


CO 


r- 


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CO 



00 


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u> 


1 


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V 


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360 



EXHIBIT A 
Page 14 



UJ 


o 


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►-* 


z 


u. 


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u. 


I 


o 


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>■ 


X 


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O 


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to 


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CO 


o 


co 


o 


CN 


o 


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10 


on 


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< 




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z 






t- 




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z 




I 




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LJ 




CO 






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gs 





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o 


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X 


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3 


z 




Ul 


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co 




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c_> 


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I 


lo 


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1- 


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C". 




o 


o 


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z 




M 


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o 


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IH 


1- 


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co 


cr 


3 


UJ 


o 


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CO 


u 


a: 




Ul 


< 


o 


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361 



EXHIBIT A 
Page 15 



o 
o 
in 

o 

z 



o 




h- 


o 




en 


< 




UJ 


o 




a 


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cr 


X 




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1— 


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o 


3 


en 


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O 


O 


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Ul 


H4 


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3 


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CI 


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o 


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z 


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< 


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in -• 


to 


to 


to 



362 



EXHIBIT A 
Page 16 



UJ 


o 


O 


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z 


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u. 


I 


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X 


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I 
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363 



EXHIBIT A 
Page 17 



D 


IU 




a 

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111 




i/> 


o 


o 




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C3 


tx. 


< 


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3 



67-159 O - 77 - 25 



364 



EXHIBIT A 
Page 18 



o 


•£ 


o 


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< 


u 


CD 


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CC 


X 


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re 

10 


u_ 


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1- 


O 


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cr 


< 


< 


< 


3 


je 


5C 



365 



EXHIBIT A 
Page 19 



bi 

LU O 

13 -• 

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366 



PRICE WATERHOUSE & CO, 



EXHIBIT B 
Page 1 



AMERICAN STOCK EXCHANGE CLIENTS 



I— 1 


C! 






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1 


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367 



EXHIBIT B 
Page 2 







o 






o 




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■ UJ 


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Q 


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m 




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co 


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t- 
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CO 


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o 
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u 





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368 



EXHIBIT B 
Page 3 



c* 


*r 


O) 


p> 


r^ 


ci 


*- 


CO 


pi 


T 



o 



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1—4 




10 




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X 




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Ul 




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111 




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t— 


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cr 


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o 


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Q- 


Li. 




cr 


< 


o 


O 


l/l 


o 

_l 


u 


I 


1XJ 


5r 


o 



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CO 


Ul 


O 


CO 


a. 


</> 


3 
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cr 


cr 




U) 


Ul 


>- 


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UJ 


o 


O 


> 


Z 


z 


a. 


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I 


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369 



EXHIBIT B 
Page 4 



• 



2 


en 


c 


r> 


i/i 


< 


*— 


c 


o 


^ 


CX 


tfl 


o 


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Q 


CD 


o 


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10 


7. 


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3 


2 


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z 


to 


o 


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t-l 


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a 


■~* 


o 


> 


s 


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a. 



370 



EXHIBIT B 
Page 5 







Q. 


X 




»-» 


LU 




r i 


s 






< 
i 


u. 




UJ 


o 




O 






Z 


U- 




< 
X 

o 


u. 

C 


> 


X 


_- 


h- 


UJ 


< 






Q. 


O 



o 
< 



3 

o 



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o 



o 
o 



o 




tM 




*-* 


Q. 


cr 


C£ 


< 


O 




o 



371 



EXHIBIT B 
Page 6 



CI 


CM 


<r 


o 


o 


CI 


v- 


o 


CO 


o 


m 


CO 


(0 


o 


to 


o> 


o 


*- 


<T 


r- 



o 
o 

q: 

to 
x 



«* 


o 


z 


a 


UJ 


Ui 


o 


o 


< 


a 



Q 
< 

O 

a: 



372 



EXHIBIT B 
Page 7 



o 

ID 
O 



u> 


o 


<r 


*— 


o 


(O 


o> 


T 








»- 




z 
















i-» 




3 




CE 












o 









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O 

UJ 




z 




>- 




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to 




0. 









LLI 




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UJ 




•-« 




►- 




in 




:£ 




X 




z 




l/> 




c= 




z 









z 




3 




Ul 




UJ 









t-« 




O 


r> 


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< 


-3 


>- 


o: 


z 
< 


3 


UJ 


X 


z 




a. 




z 




5 




t- 







O 


UJ 









UJ 


g 


c 


>- 





</> 


<r 


1 


UJ 


X 


a. 


O 



373 



EXHIBIT B 
Page 8 



CO 


CN 


<D 


«r 


c< 


•CO 


o 


o 


»- 


<r 


o 


CO 


•- 


»- 


to 





z 




a 




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o 


a 




o 




O 


o 


to 




_i 




2 


< 


»-« 




cr 




< 


o 


cr 




UJ 






»H 


cr 




i — 




l/l 


X 


< 




< 




a 


o 


X 


< 


"3 


U_ 


_j 


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3 




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O 




< 





o 
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z 
s 





< 










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1— 








Q. 


cr 




a 




cr 


o 




cr 


Q- 


O 


z 




o 


cr 


o 


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o 


o 
o 


< 


s 




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z 


3 


O 


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z 


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< 


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o 


cr 


I 


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t— 


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cr 




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z 


3 


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cr 


< 


UJ 


o 


UJ 


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z 


a 


t/> 


a 


< 






3 




u. 


o 


o 


CO 


_i 




UJ 


z 




< 


z 


1— 


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111 


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x 


X 


o 


^ 


2 


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H 


t— . 


3 


> 



o 



o 
o 
o 



374 



EXHIBIT 
Page 9 



o 
z 
< 

■JJ 
> 



375 



EXHIBIT C 
FEDERAL, STATE AND LOCAL GOVERNMENT CLIENTS agG 

FOR WHICH SERVICES WERE RENDERED IN 1975 



311 - Federal government 

Amtrak 

Armed Forces Relief and Pension Fund 

Comptroller of the Currency 

Contract Appeals Board - U.S. Navy 

Council on International Economic Policy 

Department of Commerce 

Department of Health, Education and Welfare 

'Dept of the Interior 

Dept of Justice 

Dept of State 

Export Import Bank 

Farm Credit Administration 

Federal Aviation Administration 

Federal Communications Commission 

Federal Energy Office Administration 

General Accounting Office 

Legal Services Corp 

National Service Foundation 

Pension Benefit Guaranty Corporation 

OPIC Overseas Private Investment Corp 

Small Business Administration 

U.S. Postal Service - Philatelic 

U.S. Railway Assoc 

U.S. Information Agency 

921 - State government 

Commonwealth of Massachusetts - Treasury Dept 

State of Illinois Arts Council - Chicago 

State cf Illinois - Treasurer's Office 

State of Ohio - Dept of Education 

Connecticut Dept of Transportation 

Connecticut Housing Finance Authority 

Connecticut Dept of Education 

Commecticut Commission for Higher Education 

State of Florida - Division of Aging 

State of Nebraska - Dept of Admin 

Wisconsin Dept of Administration 

New Jersey Economic Development Authority 

New York State - Dept of Mental Hygiene 

Delaware Attorney General's Office 

Penna State Legislative Audit Advisory Committee 

Penna State Board of Law Examiners 

Penna Dept of Community Affairs 

Penna State Court Administrator 

Providence, Rhode Island - Howard Development Corporation 

California Hospital Commission 

California - Sacramento Selection Consulting Center 

Alaska Division of Medical Assistance 

Missouri Public Sevice Commission 

State of Missouri - Auditor's Office 



376 



EXHIBIT C 
Page 2 



921 - State government (continued) 

Commonwealth of Puerto Rico - Economic Development Admin 

Montana State Auditor's Office 

State of Washington - Ferries and Toll Board 

State of Washington - Liquor Control Board 

State of Illinois - Controller's Office 

New York State - Dept of Budget 

Penna Dept of Affairs 

New Jersey Division of Medical Assistance 

Washington - Dept of Ecology 

931 - Local government 

City of Juneau, Alaska 

City of Soldotna, Alaska 

City of Battle Creek, Michigan 

Battle Creek, Michigan - Area Metropolitan Services Agency 

Battle Creek Transit Authority 

City of Paterson, New Jersey 

Boston, Mass. - Auditor's Dept 

Boston, Mass- - School Committee 

Town of Brookline, Mass. 

Town of Reading, Mass. 

City of Asheville, N. Carolina 

Cumberland County, N. Carolina 

Northern Illinois - Regional Transit Authority 

Village of Carol Stream, Illinois 

Village of Glen Ellyn, Illinois 

City of Weschester - Park District 

City of Cincinnati, Ohio 

Transit Authority of Northern Kentucky - Newport, Kentucky 

Cleveland, Ohio - City Council 

Columbus, Ohio - Board of Education 

Mid-Ohio Regional Planning Commission, Columbus 

City of Dallas, Texas 

City of Cedar Hill, Texas 

City of Gross Point Woods, Michigan 

City of Hallandale, Florida 

Harris County, Texas - Treasurer's Office 

Suffolk County, New York - Water Authority 

Village of Kings Point, Long Island 

Village of Rockville Centre, Long Island 

Los Angeles, California - Water Revenue Fund 

San Bernardino, California - Municipal Water Dept 

City of Memphis, Tenn 

City of Homestead, Florida 

Metropolitan Dade County, Florida - Aviation 

South Florida Regional Planning Council, Miami 

Milwaukee County, Wisconsin - District Attorney's Office 

Milwaukee County, Wisconsin - Hospital & Mental Instititions 

Outagamie County, Wisconsin - Health Center 

Rock County, Illinois - Health Care Center 



377 



EXHIBIT C 
Page 3 



931 - Local government (continued) 

City of Brentwood, Tennessee 

Nashville, Tennessee - First Suburban Water Utility District 

New York City Transit Authority 

City of Ocala, Florida 

City of Peoria, Illinois - Dept of Public Works 

Greater Peoria, Illinois - Sanitation and Sewage Disposal Dist 

Bucks County, Penna - Office of Manpower Programs 

City of Englewood, New Jersey. 

Philadelphia, Penna - City Controller 

City of Glendale, Arizona 

Fox Chapel Borough, Penna 

Sewickley Borough, Penna 

City of Portland, Oregon 

City of Vancouver, Washington 

Lincoln County, Oregon - School District 

Washington County, Oregon 

City of Rocky Mount, N. Carolina 

City of Raleigh, N. Carolina 

County of Monroe, New York 

Rochester-Genesee, New York - Regional Transporation Authority 

City of St. Louis, Missouri - Water Division 

City of Wellston, Missouri 

St. Louis County, Missouri - County Police 

City of San Diego, California 

Coachella Valley, California - County Water District 

San Diego, California - Comprehensive Planning Organization 

California Toll Bridge Authority 

Municipality of San Juan, Puerto Rico 

City of Gardena, California 

Orange County, California - Transit District 

Orange County, California - Civic Center Authority 

Orange County, California - Revenue Sharing Fund 

City of Santa Fe Springs, California 

King County, Washington - Systems Services Dept 

Municipality of Metropolitan Seattle, Washington 

Seattle, Washington - Civil Service 

City of Seattle, Washington 

King County, Washington - Water District #75 

County of Delaware, New York - Dept of Social Services 

Onondaga County, New York - Water Authority 

City of Clearwater, Florida 

City-County Water Agreement - Toledo, Ohio 

Montogmery County, Maryland - Landlord-Tenants Baord 



378 



EXHIBIT C 
Page 4 



932 - Local authority for toll roads, bridges, tunnels, etc. 

Jersey City, New Jersey - Housing Authority 

City of Boston - Educational Facilities Authority 

Chicago, Illinois - Metropolitan Fair and Exposition Authority 

Port of New York Authority, New York City 

Aliquippa, Penna - Municipal Water 

Bellevue, Penna - School Authority 

Borough of Alquippa, Penna - Sewer System Fund 

Center Township, Penna - Sewer Authority 

Chartiers Valley, Penna - District Flood Control 

Fox Chapel, Penna - Sanitary Authority 

Sewickley Area, Penna - School Authority 

Sewickley Township, Penna - School Authority 

Washington-East Washington, Penna - Joint Water & Sewage Authority 

Portland, Oregon - Metropolitna Area 4C Council 

Monroe County, New York - Water Authority 

St. Louis, Missouri - Tower Grove Park 

State of Washington - Urban Arterial Board 

Toledo, Ohio - Metropolitan Housing Authority 

821 - Goverment operated schools 

Cambridge, Mass. - School Dept 

Dallas, Texas - Independent School District 

St. Marks School of Texas - Dallas 

Denver, Colorado - Public School District 

Jefferson County, Colorado - School District 

L'anse Creuse, Michigan - Board of Education 

Indianapolis, Indiana - Public Schools 

Berkeley, California - Unified School District 

Upper Darby, Penna - School District 

North Clackamas, Oregon - School District 

Brentwood, Missouri - School District 

Jennings, Missouri - School District 

Grossmont, California - Union High School 

Fremont, California - Unified School District 

Santa Clara, California - Unified School District 



379 



EXHIBIT D 



SERVICES PERFORMED BY PW FOR FEDERAL GOVERNMENT 
DURING THE YEARS JUNE 30, 1970 THROUGH JUNE 30, 1975 



(YEARS ENDED JUNE 30) 



Amtrak 

Armed Forces Relief and Pension Fund 
Comptroller of the Currency 
Contract Appeals Board - U.S. Navy- 
Council on International 

Economic Policy 
Department of Commerce 
Dept. of Health, Education & Welfare 
Dept. of Housing & Urban Development 
Dept. of the Interior 
Dept. of Justice 
Dept. of Labor 
Dept. of State 

Economic Development Administration 
Environmental Protection Agency 
Export Import Bank 
Firm Credit Administration 
Federal Aviation Administration 
Federal Communications Commission 
Federal Energy Office Administration 
General Accounting Office 
Internal Revenue Service 
Legal Services Corp. 
National Service Foundation 
Pension Benefit Guaranty Corporation 
OPIC Overseas Private Investment Corp 
Small Business Administration 
Treasury Department 
U.S. Postal Service - Philatelic 
U.S. Railway Assoc. 
U.S. Information Agency 



1975 1974 1973 1972 1971 1970 



X 




X 




X 


X 


X 




X 




X 


X 




X 


X 


X 


X 


X 



X 



X 

X 
X 
X 
X 

X 
X 
X 
X 
X 

X 
X 
X 



X 

X 
X 



X 



X 

X 
X 

X 



X 



>; 



X 
X 



X 



67-159 O - 77 - 26 



380 



TOUCHE ROSS & CO. 

1633 BROADWAY 
NEW YORK. NEW YORK 10019 



RUSSELL E. PALMER 

Managing Partner February 20, 1976 



Honorable Lee Metcalf 
United States Senate 
Washington, D.C. 20510 

Dear Senator Metcalf: 

I am pleased to forward the information 
requested in your letter of December 19, 1975. 
Answers are sequenced in the same order as were 
the questions. Explanatory notes are included 
whenever numeric data may not respond precisely 
to the question asked. 

This information is submitted by Touche Ross 
solely for the information of your Committee and 
its staff. Nearly all of the enclosed data is 
proprietary, is developed for our internal use, 
and is not made available to the accounting pro- 
fession or the public. We trust you understand 
our interest in controlling its distribution. 

I trust the enclosed statements will satisfy 
the requirements of the Subcommittee on Reports, 
Accounting and Management. 

Very truly yours, 



iSL^ ^ 6L^ 



REP/jr 



381 



TOUCHE ROSS & CO. 



Replies to Questionnaire of Reports, Accounting and Management 
Subcommittee (as of December 31, 1975) . 



1. 


76 






2. 


37 






3. 


235 






4. 


451 






5. 


33 






6. 


4,219 




7. 


A. 


Auditing and Accounting 


62.2% 




E. 


Tax services 


23.5 




C. 


Management services 


14.3 
100 . 0% 



D. None. However, actuarial services are made available 
through a joint venture arrangement with Touche Ross 
Stennes . 

E. COXRDF.NTIAL I5Y T0UC1IT. ROSS F, COMPANY RiiOHST 

F. None 

A. Yes, on a modest scale. For the most part these 

services are an adjunct to those normally provided 
. audit, tax and management services clients. 



B. 


Yes 


C. 


Yes 


D. 


Yes 


E. 


NO. 



See 7 D. above 



382 



Toiiche Ross & Co. 
Page Two 



F. Only on a voluntary basis at no expense to the govern- 
ment: At present, Mr. D.V. Burchfield, a partner, is 
serving on the General Services Administration Advisory 
Committee on Cash Management. 

9. Separate listing attached 

10. Separate listing attached 

11. Other publicly-held corporations for which Touche Ross & Co. 
is the independent auditor - 380. 

Privately-held corporations for which Touche Ross & Co. is 
the independent auditor - 1,516. 

12. Partners 442 
Principals 
Employees 1,016 

13. Yes, as follows: 

1973 $200,000 

1974 200,000 

1975 200,000 

14. Separate listing attached 

15. - Separate listing attached 

16. Fiscal Year Ended August 31, 

1970 



1971 
1972 
1973 
1974 
1975 



CONFIDENTIAL BY 
TOUCHE ROSS P, COMPANY 
REQUEST 



17. No. 



383 



louche Ross & Co. 
Question #9 



Corporations listed on the New York Stock Exchange for 
which Touche Ross & Co. is the independent auditor 



NAME 
ALBERTSONS INC. 
ALEXANDERS INC. 

ALLIED STORES CORP 
AMERICAN HOIST & DERRICK 

AMERICAN HOSPITAL SUPPLY 

AMERICAN MOTORS CORP 

APL CORP 

ARKANSAS LOUISIANA GAS CO 

ARMOUR AND COMPANY 

ASSOCIATED DRY GOODS CORP 
AUTOMATIC DATA PROCESSING 
BLAIR JOHN & COMPANY 
BLOCK H & R INC 

BOEING COMPANY THE 
BUCYRLS-ERIE CO 
BURNDY CORP 



ADDRESS 

P.O. Box 20, Boise, Id. 83701 

3rd Ave. & 152nd St. , 
Bronx, N.Y. 

401 5th Ave., N. Y. , N.Y. 10016 

63 Robert St. , 

St. Paul, Mn. 55101 

1740 Ridge Ave. , 
Evanston, II. 60201 

142 50 Plymouth Rd. 
Detroit, Mi. 48232 

557 Wortman, Brooklyn, N.Y. 
N.Y. 11208 

Slattery Bldg., Shreveport, 
La. 71101 

401 N. Wabash Ave., Chicago, 
II. 50509 

417 5th Ave., N.Y. , N.Y. 10016 

405 Rte 3, Clifton, N.J. 07015 

717 5th Ave., N.Y, N.Y. 10020 

4410 Main St., Kansas City, 
Mo. 6411.1 

P.O. Box 3707, Seattle, Wa. 98124 

So. Milwaukee, Wi. 53172 

Richard Ave., Norwalk, Ct. 06850 



384 



-2- 



Corporations listed on the New York Stock Exchange for 
which- Touche Ross & Co. is the independent auditor 



NAME 
C.I.T. FINANCIAL CORPORAT 

CALIFORNIA FINANCIAL CORP 
CASCADE NATURAL GAS CORP 

CHELSEA INDUSTRIES INC. 

CHRYSLER CORP 

CITIZENS MTGE INVESTMENT 
COASTAL STATES GAS CORP 

COMPUTER SCIENCES CORPORA 

DESOTO INC 

ELGIN NATIONAL IND 

EVANS PRODUCTS COMPANY 
FAIRCHILD INDUSTRIES INC 

FEDERATED DEPARTMENT STOR 

FIRST CHARTER FINANCIAL C 



ADDRESS 

650 Madison Ave., N.Y. , 
N.Y. 10022 

285 S. 1st St., San Jose,Ca. 

222 Fairview Ave.,N., 
Seattle, Wa. 98109 

181 Spencer Ave., Chelsea, 
Ma. 02150 

841 Massachusetts Ave., 
Detroit, Mi. 48231 

600 Woodward, Detroit, Mi. 48226 

P.O.Box 521, Petroleum Tower, 
Corpus Christi, Tx. 

650 N. Sepulveda Blvd., 
El Segundo, Ca . 90245 

1700 S. Mt. Prospect Rd., 
Des Plaines, II. 60016 

366 Bluff City Blvd., Elgin, 
II., 60120 

P.O.Box 3295, Portland, Or. 97208 

Sherman Fairchild Tech. Cen. 
Germantown, Md. 20967 

222 W. 7th St., Cincinnati, 
Oh. 45202 

9465 Wilshire Blvd., Beverly 
Hills, Ca. 90212 



385 



-3- 



Corporations listed on the New York Stock Exchange for 
which Touche Ross & Co. is the independent auditor 



NAME 
FLEMING CO INC 

FOXBORO CO THE 

FRUEHAUF CORP 

GOLDEN WEST FINANCIAL COR 
GREYHOUND CORPORATION 

IDS PROPERTIES, INC. 

INTERSTATE STORES 

IOWA BEEF PROCESSORS INC 

JEWEL COMPANIES INC 

JUSTICE MORTGAGE INVESTOR 
KAISER CEMENT & GYPSUM CO 

KELLWOOD CO 

LARWIN MULTIHOUSING CORP 

LENOX INCORPORATED 

LIBBY MC NEILL & LIBBY 



ADDRESS 

Garlinghouse Bldg., Topeka, 
Ka. 66612 

38 Neponset Ave., Foxboro, 
Ma. 02035 

10940 Harper Ave., Detroit, 
Mi. 48232 

1632 Franklin St., Oakland, Ca. 

10 S. Riverside Pi., Chicago, 
II. 60606 

1050 Roanoke Bldg., Minneapolis, 
Mn. 55402 

111 8th Ave., N.Y.,N.Y. 10011 

Dakota City, Ne . 68731 

1955 W. North Ave., Melrose Pk. , 
II. 60160 

1400 Main St., Dallas, Tx. 75202 

300 Lakeside Dr. , Oakland, 
Ca. 94612 

9909 Clayton Rd., St. Louis, 
Mo. 63124 

9100 Wilshire Blvd., Beverly 
Hills, Ca. 90212 

Prince & Meade Sts., Trenton, 
N.J. 08605 

200 So. Michigan Ave., Chicago, 
II. 60604 



386 



-4- 



Corporations listed on the New York Stock Exchange for 
which TOuche Ross & Co. is the independent auditor 



NAME 
LITTON INDUSTRIES INC 

MACY R H & CO INC 

MEAD CORP 

MEDICAL COMPUTER SYSTEMS, INC 

MICHIGAN WHEEL CORP 

MUNFORD INC 

NATIONAL CAN CORP 

NATIONAL CITY LINES INC 

NATIONAL DETROIT CORP 

NATIONAL INDUSTRIES INC 

NORTH CAROLINA UTILITY 
NUCOR CORP 

OXFORD INDUSTRIES INC 

PAMIDA INC 
PILLSBURY CO 



ADDRESS 

9370 Santa Monica Blvd., 
Beverly Hills, Ca. 90210 

151 W. 34th St., N.Y. ,N.Y. 10001 

Talbott Tower, Clayton, Oh. 45402 

1625 W. Mockingbird Ln., 
Dallas, Tx. 75235 

1501 Buchanan, S .W. , Grand 
Rapids, Mi. 49502 

68 Brookwood Dr.,N.E., Atlanta, 
Ga. 30309 

5959 Cicero Ave., Chicago, 
II. 60638 

700 Security Life Bldg. , Denver, 
Co. 80202 

611 Woodward Ave., Detroit, 
Mi. 48226 

510 W. Broadway, Louisville, 
Ky. 40202 

Atlanta, Ga . 

4425 Randolph Rd., Charlotte, 
N.C. 28211 

222 Piedmont Ave., N.E., Atlanta, 
Ga. 30312 

8800 "F" St., Omaha, Ne . 

600 Pillsbury Bldg, Minneapolis ,Mn. 



387 



-5- 



Corporations listed on the New York Stock Exchange for 
which Touche Ross & Co. is the independent auditor 



NAME 
R T E CORP 

RELIANCE GROUP INC 

ROHR INDUSTRIES 

RONS ON CORP 
ROPER CORP 

SAFEGUARD INDUSTRIES INC 

SALANT CORP 
SAV-ON-DRUGS INC 

SEARS ROEBUCK AND CO 
SKIL CORP 

SOLA BASIC INDUSTRIES INC 
SOS CONSOLIDATED INC 

SQUARE D CO 

ST. PAUL SECURITIES INC 

STARRETT, LS COMPANY THE 



ADDRESS 

1900 E. North St., Waukesha, 
Wi. 53186 

17 Barston Rd., Great Neck, 
N.Y. 11021 

Foot of H St., Chula Vista, 
Ca. 92010 

1 Ronson Rd. ,Woodbridge, N.J. 07095 

1905 W. Court St., Kankakee, 
II. 60901 

1616 Walnut St., Philadelphia, 
Pa. 19103 

330 5th Ave. , N.Y. , N.Y. 10001 

3856 W. Santa Barbara Ave., 
Los Angeles, Ca. 

925 S. Homan Ave, Chicago, II. 60607 

5033 Elston Ave, Chicago, II. 60630 

P.O.Box 753, Milwaukee, Wi. 53201 

1411 N. Woodward Ave., 
Birmingham, Mi. 48011 

Executive Plaza, Dark Ridge 
II. 60068 

385 Washington St., St. Paul, 
Mi. 55102 

121 Crescent St, Athol, Ma. 01331 



388 



-6- 



Corporations listed on the New York Stock Exchange for 
which Touche Ross & Co. is the independent auditor 



NAME 
SUPER VALUE STORES INC 

SUPERMARKETS GENERAL CORP 
TECKLA INC 

TESORO PETROLEUM 

TEXAS OIL & GAS CORP. 

TRANS-WORLD FIN CO 

TSC INDUSTRIES 
UNISHOPS INC 

VENICE INDUSTRIES INC 
VESTAUR SECURITIES INC 

WELBILT CORPORATION 
WESTLAND CAPITAL CORP 

WYOMING BANCORPORATION 

ZALE CORP 



ADDRESS 

101 Jefferson Ave, Hopkins, 
Mi. 55343 

116 Main Ave., Passaic, N. J. 07055 

Bank of Southwest Bldg., Amarillo, 
Tx. 79109 

8520 Crown Hill Blvd., San 
Antonio, Tx. 

2520 Fidelity Union Tower, 
Dallas, Tx. 75201 

9601 Wilshire Blvd., Beverly 
Hills, Ca. 90210 

4747 N. Ravenswood Ave, Chicago, 11. 

21 Caven Point Ave., Jersey City, 
N.J. 07305 

1407 Broadway, N.Y.,N.Y. 

1411 Walnut St., Philadelphia, 
Pa. 19102 

Welbilt Square, Maspeth,N.Y. 11378 

** 2021 Hennepin Ave., Minneapolis, 
Mi. 55413 

Cheyenne, Natl. Bank Tower Bldg., 
Cheyenne, Wy. 82 001 

Box 2219, Dallas, Tx. 75221 



389 



louche Ross & Co. 
Question #10 



Corporations listed on the American Stock Exchange for 
which Touche Ross & Co. is the independent auditor 



NAME 
AERONCA INC 

AIRBORNE FREIGHT CORP 
AMERICAN PRECISION INDUST 

AQUITANE CO CANADA LTD 

ARUNDEL CORPORATION 

BARCLAY INDUSTRIES INC 
BARCO OF CALIFORNIA 

BARNWELL INDUSTRIES INC 

BERG ENTERPRISES, INC. 
BIG V SUPERMARKETS 
BLESSINGS CORP 
BOMAINE CORP 

BRANCH INDUSTRIES, INC 
BUTLER CREATION INT ' L 
BUTTES GAS & OIL CO 

C H B FOODS INC 

C R S DESIGN ASSOCIATES I 



ADDRESS 

1712 Gentiantown Rd., 
Middletown, Oh. 45042 

Coleman Bldg. .Seattle, Wa. 98104 

2777 Walden Ave. .Buffalo, 
N.Y. 14225 

1300 Calgary House, 550 6th 
Ave.,S.W., Clagary, Alberta, 
Canada 

501 St. Paul Pi. , Baltimore, 
Md. 21202 

65 Industrial Rd. ,Lodi, N.J. 07644 

350 W. Rosecrans Ave., 
Gardena, Ca. 90248 

Henry C. Beck Bldg., 
Shreveport, La. 71101 

12 Center St . ,Metuchin, N.J. 

176 N. Main St ., Florida, N. Y. 10921 

146 Madison Ave ., N.Y. , N.Y. 10016 

2121 S.Bundy Dr., Los Angeles, 
Ca. 90064 

146 Madison Ave . ,N. Y. ,N. Y. 10016 



2150 Franklin St., Oakland, 
Ca. 94612 

7351 Crider Ave., Pico Rivera, Ca. 

Ill W. Loop, S. Houston, Tx. 77027 



390 



-2- 

Corporations listed on the American Stock Exchange for 
which Touche Ross & Co. is the independent auditor 



NAME 
CERTRON CORPORATION 

CHADWICK-MILLER INC 
CHRISTIANA COMPANIES, INC 

CITY GAS CO OF FLORIDA 
CLOPAY CORPORATION 
COMMERCIAL METAL CO 
COMPAC CORP 

COMPO INDUSTRIES INC 
COTT CORP 

CREST-FOAM CORP 
DELTOWN FOODS INC 

DIXILYN CORP 

EDWARDS A G & SONS INC 

EVANS- ARISTOCRAT INDUSTRI 

FINANCIAL CORP SANTA BARB 



ADDRESS 

1701 S. State College Blvd., 
Anaheim, Ca. 

690 Dudley St. , Boston, Ma. 

3025 Olympic Blvd., Santa Monica, 
Ca. 90404 

955 E.25th St ., Hialeah,Fl . 33013 

Clopay Square, Cincinnati, Oh. 45214 

512 S.Arkard St ., Dallas, Tx. 75221 

420 Frelinghuyser Ave, 
Newark, N.J. 07114 

125 Roberts Rd. ,Waltham, Ma . 02154 

177 Granite St., Manchester, 

N.H. 03101 

100 Carol Pi . ,Moonachie, N.J. 

170 Sawmill River Rd., Yonkers, 
N.Y. 10702 

P.O.Box 3427 Odessa, Tx. 79760 

I N.Jefferson Ave. , St. Louis, 
Mo. 63103 

400 Trumbell St., Elizabeth, 
N.J. 07206 

II W.Figueroa St., Santa 
Barbara, Ca. 93102 



FRIGITRONICS INC 



770 River Rd. , Shelton, Cn. 06484 



391 



-3- 



Corporations listed on the American Stock Exchange for 
which Touche Ross & Co. is the independent auditor 



NAME 
GARLAND CORP 

GAYNOR- STAFFORD INDUSTRIES 
GOOD L S & CO 
GORIN STORES INC 

GRUEN INDUSTRIES INC 
HAMPTON INDUSTRIES 

HEALTH INDUSTRIES 
HEITMAN MORTGAGE INVESTOR 

HOUSTON OIL & MINERALS CO 

HOWELL INDUSTRIES INC 

ICB CORP THE 

JACLYN INC 

JUNIPER PETROLEUM CORP 

KAISER INDUSTRIES CORP 

KUHN'S-BIG K STORES CORP 

LLOYDS ELECTRONICS INC 



A DDRESS 

Garland Plaza, Brockton, Ma. 02401 

1450 Broadway, N. Y. ,N.Y. 10018 

1141 Market St . .Wheeling, W.Va. 

1019 Commonwealth Ave., 
Boston, Ma. 02106 

20 W.47th St. ,N.Y. ,N.Y. 10036 

501 E. Caswell St., Kinston, 
N.C. 28501 

39 Exchange Pi., Salt Lake City,Ut 

10 S.LaSalle St., Chicago, 
II. 60603 

242 The Main Bldg ., Houston, 
Tx. 77002 

12 340 Cloverdale Ave., 
Detroit, Mi. 48204 

New Orleans, La. 

635 59th St., W.N.Y.,N.J. 

1600 Grant St. .Capital Life Cen., 
Denver, Co. 

Kaiser Center, 300 Lakeside Dr. , 
Oakland, Ca. 94604 

3040 Sidco Dr ., Nashville, 
Tn. 37204 

18601 S. Susana Rd. , Compton, 
Ca. 90221 



392 



-4- 



Corporations listed on the American Stock Exchange for 
which Touche Ross & Co. is the independent auditor 



NAME 
LOEHMANNS INC 
LOGISTICS INDUSTRIES CORP 

MASONEILAN INTERNATIONAL 
MDC CORP 

MEDCO JEWELRY CORP 

NATIONAL SYSTEMS CORP 

NOVO INDUSTRIAL CORP 
OZARK AIR LINES INC 

PARK ELECTROCHEMICAL CORP 

PATRICK PETROLEUM CO 

PHILADELPHIA MORTGAGE TRU 

POLORON PRODUCTS OF LOUIS 

READING INDUSTRIES INC 
RESTAURANT ASSOC IND INC 
SAMBOS RESTAURANTS INC 



ADDRESS 

9 W.Fordham Rd. , Bronx, N.Y. 10468 

400 Nepperham Ave., Yonkers, 
N.Y. 10701 

63 Nahatan St., Norwood, Ma. 02 062 

26 Springdale Rd. , 
Cherry Hill, N.J. 08003 

1211 Walnut St., Kansas City, 
Mo. 64106 

4401 Birch St., Newport 
Beach, Ca. 92660 

219 E.42nd St. , N.Y. , N.Y. 10017 

Lambert St., St. Louis Municipal 
Airport, St. Louis, Mo. 63145 

84-10 Linden Pi., Flushing, 
N.Y. 11354 

744 W. Michigan Ave., 
Jackson, Mi. 49201 

215 S. Broad St., Philadelphia, 
Pa. 19107 

165 Huguenot St., New Rochelle, 
N.Y. 10801 

350 5th Ave. , N.Y. , N.Y. 

1540 Broadway, N.Y. , N.Y. 

3760 State St., Santa Barbara, 
Ca. 93105 



393 



-5- 



Corporations listed on the American Stock Exchange for 
which Touche Ross & Co. is the independent auditor 



NAME 
SCHICK INCORPORATED 
SEA CONTAINERS INC 
SEASON-ALL INDUSTRIES INC 
SHENANDOAH CORP 

SHOPWELL INC 

SUNCRAFT DIV ABERDEEN MFG 

SUPERIOR SURGICAL MFG CO 

SYSCO CORPORATION 

TOWN & COUNTRY MOBILE HOM 

TURBODYNE CORP 
UNIVERSAL CONTAINER CORP 

UNIVERSAL-RUNDLE CORP 
VALLEY INDUSTRIES INC 



ADDRESS 

Webster Rd. ,Milford,Cn. 06460 

345 Park Ave . ,N.Y. ,N.Y. 10022 

Rte 119 S. .Indiana, Pa. 15701 

P.O.Box 551, Charles Town, 
W.Va. 25414 

400 Walnut Ave. , Bronx, N.Y. 10454 

95 Santa Fe Ave ., Fresno, Ca . 93721 

63 New York Ave ., Huntington, 
N.Y. 11743 

800 Capital Nat" 1. Bank Bldg., 
1300 Main St. Houston, Tx. 77CD2 

1st Wichita Nat' 1. Bank Bldg. 
Wichita Falls, Tx. 

800 Central Ave., Minneapolis, Mn. 

104 S. Central Ave., Valley 
Stream, N.Y. 11580 

P.O. Box 960, New Castle, Pa. 16103 

c/oFederated Purchaser Inc, 
475 5th Ave., N.Y. , N.Y. 



VULCAN INC 



Ave. E, Latrobe, Pa. 15950 



394 



Touche Ross & Co. 

14. Listing of departments, agencies or subdivisions of 
federal, state, municipal or other government authority 
for which Touche Ross & Co. performed any services during 
1975. 



395 



-2- 



FEDERAL 

Board of Governors, Federal Reserve System 

Executive Office of the President 

Federal Communications Commission 

Federal Energy Administration 

Federal Home Loan Bank Board 

HEW, Department of Medicaid 

HEW, Social and Rehabilitation Service 

Labor, Department of 

National Commission on Water Quality 

National Corporation for Housing Partnerships 

National Institute on Drug Abuse 

National Institute of Education 

Office of the Assistant Secretary of Defense/Health & Environment 

Special Action Office for Drug Abuse Prevention 

Transportation, Department of 

U.S. Department of the Army 



67-159 O - 77 - 27 



396 



-3- 



STATE 

Alaska/Health & Social Services Department 

Arkansas/HEW 

Arkansas/Public Service Commission 

California/Highway Patrol Department 

California/Veterans, Department of 

Colorado/Revenue Department 

Colorado/River Commission 

Delaware/Labor Department 

Delaware/River and Bay Authority 

District of Columbia 

Florida/INTERAiMA 

Florida/Parole and Probation 

Georgia/Attorney General 

Georgia/Corrections Department 

Hawaii/Housing Authority 

Hawaii/International Sport . 

Idaho/Auditor 

Idaho/Health & Welfare Department 

Idaho/Highway Department 

Idaho/Treasurer 

Illinois/Correction Department 

Illinois/Health Facilities Authority 

Illinois/Housing Authority 

Indiana/Governors Task Force 

Indiana/State Police 

Indiana/Title XX 

Indiana/Welfare, Department of 

Iowa/Power & Light 

Kansas/Corrections Department 

Kansas/Social 

Kentucky/Finance Department 

Kentucky /Human Resources Department 

Kentucky/Public Service Commission 

Massachusetts/Advisory Council on Vocational Technical Education 

Massachusetts/Defense Committee 

Massachusetts/Executive Office of Manpower Affairs 

Michigan/Commerce, Department of 

Michigan/Highway 

Michigan/Office of Substance Drug Abuse 

Michigan/Public Service Commission 

Michigan/Senate Tax Committee 

Michigan/Social Services Department 

Minnesota/Employment Services Department 

Minnesota/Public Service Commission 

Mississippi/Public Service Commission 

Missouri/Council on Criminal Justice 

Missouri/Law Enforcement Council 

Missouri/State Auditor 

Montana/Medicaid 

Nebraska/Corrections Department 

Nebraska/Welfare Department 

Nevada/Public Service Commission 



397 



-4- 



New Hampshire/Public Service Commission 

New Jersey/Labor & Industries Department 

New Jersey/Public Advocate 

New York/Board of Education 

New York/Moreland Commission 

North Carolina/Public Service Commission 

Ohio/Public Service Commission 

Oklahoma/City Housing 

Oregon/Human Resources 

Pennsylvania/Turnpike 

Rhode Island/Education Department 

South Carolina/Probation Department 

Tennessee/Public Health Department 

Texas/Attorney General 

Texas/Board of Pardons & Paroles 

Texas/Corrections Department 

Vermont/Public Service Commission 

Virginia/Health Department 

Virginia/Welfare Department 

Washington/Board for Community College Education 

Wyoming/Health and Social Services 

Wyoming/Manpower 

Wyoming/Public Service Commission 



398 



-5- 



LOCAL 



TOUCHE ROSS & CO, 
OFFICE 



Alameda County, California/WAT 

Albany 

Allegheny County, Pennsylvania/CETA 

Allegheny County Ind . Dev. 

Anchorage, Alaska, Greater Borough of 

Atlanta, Georgia/Attorney General 

Atlanta, Georgia/Vehicle Maintenance Division 

Atlanta, Georgia/Housing Authority 

Atlantic City, New Jersey 

Atlantic County, New Jersey 

Bellevue, City of 

Bensalem Twp. , Pennsylvania 

Board of Coop Education 

Boston, Massachusetts/Police Dept. 

Caledonia Board of Education 

Cape May Point Bor. , New Jersey 

Carson City 

Chapel Hills, Colorado/Water 

Cherokee Water District, Colorado 

Chesapeake, Virginia 

Chicago, Illinois/Mayors Office of Manpower 

Cimarron, Colorado/Sanitation 

City School District 

Clermont City San. 

Cleveland, Ohio 

C M Co. Bridge Comm. 

Community Action Program 

Cook County, Illinois/Clerk of Circuit Court 

Coopersville Board of Education 

Corpus Christi, Texas 

County Counselor 

Cranford Twp. 

Criminal Justice Inst. 

Cumberland County 

Cupertino Union School 

Dade County, Florida/Water & Sewer Bd. 

Dallas, Texas/County Mental Health & Retardation 

Darby Borough, Pennsylvania 

Dayton, Ohio/Metro Housing 

Dennis Twp. 

Denver, Colorado/County Courts 

Denver, Colorado/HEW 

Denver, Colorado/Housing Authority 

Denver, Colorado/Water Dept. 

Detroit, Michigan/House of Coriection 

Detroit, Michigan/Model Neighborhood 

Detroit, Michigan/Police Dept. 

Donala Water and Sanitation 

Dorchester, Massachusetts/Courts 

Dover, Delaware 

Dupage County, Illinois 

Durall Co. Water Dis. 



San Francisco 

Portland 

Pittsburgh/Philadelphia 

Pittsburgh 

Seattle 

Atlanta 

Atlanta 

Atlanta 

Philadelphia 

Philadelphia 

Cincinnati 

Philadelphia 

Rochester 

Boston 

Grand Rapids . 

Philadelphia 

Grand Rapids 

Denver 

Denver 

Atlanta/Washington 

Chicago 

Denver 

Rochester 

Cincinnati 

Cleveland 

Philadelphia 

Grand Rapids 

Chicago 

Grand Rapids 

Houston 

St. Louis 

Newark 

Detroit 

Philadelphia 

San Francisco 

Dallas 

Dallas 

Philadelphia 

Dayton 

Philadelphia 

Denver 

Denver 

Denver 

Denver 

Detroit 

Detroit 

Detroit 

Denver 

Detroit 

New York 

Chicago 

Houston 



399 



-6- 



LOCAL ( cont'd 



TOUCHE ROSS & CO, 
OFFICE 



East Orange, New Jersey 

Family Service 

Federation of Rock 

Fennville, City of 

Florham Park Sewer 

Fond du Lac, Wisconsin 

Forest Hills City 

Franklin - McKinley 

Fresno Metro Flood 

Fulton County, Georgia/Tax Assessors Office 

Garden State Water 

Garland, Texas 

Grand Rapids, Michigan 

Grand Harbor/Board of Education 

Greenville, South Carolina 

Hammonton, New Jersey 

Hartford, Connecticut 

Hialeah, Florida/Housing Authority 

Houston, Texas 

Human Development Corp. 

Independence, Missouri 

Ionia, Michigan 

Jacksonville, Florida 

Jefferson County, Kentucky 

Jersey City, New Jersey/Board 

Kansas City, Missouri/Corrections Dept. 

Kent County, Michigan 

Kentwood, Michigan/Board of Education 

King County, Washington/Court House 

Land Reutilization Authority 

Lansing, Michigan/Social Welfare 

Los Angeles, California/Emergency Medical Service 

Louisville, Kentucky/Riverfront Corp. 

Lower Twp., Philadelphia, Pennsylvania 

Lower Twp., Philadelphia, Penn. /Board of Educ . 

Marion County, Oregon 

Miami, Florida/Chamber of Commerce 

Miami, Florida/Postal Service 

Middlesboro, Kentucky 

Minneapolis, Minnesota/Human Resources Dept. 

Miramar, Florida 

Missouri Law Enforcement Agency 

Model Cities 

Model Cities 

Model Neighborhood 

Monmouth County 

Montclair Redevelopment 

Montgomery Public 

Morristown, New Jersey/Water Dept. 

Newark, New Jersey/Board of Education 

Newark, New Jersey/Director of Manpower 

New Castle County, Pennsylvania 



Newark 

Detroit 

Denver 

Grand Rapids 

Newark 

Milwaukee 

Nashville 

San Francisco 

Fresno 

Atlanta 

New York 

Dallas 

Detroit 

Grand Rapids 

Atlanta 

Philadelphia 

Boston 

Miami 

Houston 

St. Louis 

Kansas City 

Grand Rapids 

Atlanta 

Louisville 

Newark 

Detroit 

Grand Rapids 

Grand Rapids 

Seattle 

St. Louis 

Detroit 

Los Angeles 

Louisville 

Philadelphia 

Philadelphia 

Portland 

Miami 

Miami 

Louisville 

Minneapolis 

Atlanta 

St. Louis 

Cincinnati 

Grand Rapids 

Detroit 

Newark 

Newark 

Washington 

Newark 

Newark 

Newark 

Philadelphia 



400 



-7- 



LOCAL ( cont'd ) 



TOUCHE ROSS & CO, 
OFFICE 



New Haven, Connecticut/Police 

New Jersey/Dept. of Labor & In. 

New York Model Cities 

New York, New York/Board of Education 

Nolan County-City of Sweetwater, Texas/Hospital Bd . 

Norcen Housing Con. 

North Kansas City School, Missouri 

Northwest Regional Council 

North Wildwood, New Jersey 

Nueces Co., Texas/Water Dis. 

Oak Park, City of 

Ocean City, Philadelphia 

Ocean City, Philadelphia/Board of Education 

Oshkosh Schools, Wisconsin 

Paterson, New Jersey 

P. G. County Government 

Philadelphia, Pennsylvania/Office of Controller 

Phoenix, Arizona 

Pittsburgh, Pennsylvania/Model Cities 

Polk County, Oregon 

Pontiac, Michigan/Public Works Dept. 

Pontiac, Michigan/Stadium Authority 

Port Huron, Michigan 

Port of Port Angeles, Washington 

Port of Portland, Oregon 

Port of San Francisco, California 

Port of Seattle, Washington 

Poway Unified School District, California 

Project Search 

Regional Justice Institute 

Rochester, New York/City Engineer 

Rockland County, New York 

Rome, Georgia 

Royal Oak, Michigan 

Sacramento, California 

Salem, Oregon/Housing Authority 

Salem, Oregon/Sewer and Dr. 

San Antonio, Texas/Housing Authority 

San Francisco,- California/Adult Probation 

San Francisco Airport Commission 

San Francisco, California/Golden Gate Bridge 

San Francisco, California Redevelopment 

San Mateo, California 

Santa Clara County, California 

Santa Monica, California 

Scheboygan, Wisconsin 

School Dist. 11 - Elem., Wisconsin 

Scotch Plains Twp., New Jersey 

Scottsdale, Arizona » 

Seattle, Washington/Community Development 

Seattle, Washington/Controllers Office 

Seattle, Washington/General Services Dept. 



Boston 

Newark 

New York 

New York 

Atlanta 

Pittsburgh 

Kansas City 

Seattle 

Philadelphia 

Houston 

Detroit 

Philadelphia 

Philadelphia 

Milwaukee 

Newark 

Washington 

Philadelphia 

Phoenix 

Pittsburgh 

Portland 

Detroit 

Detroit 

Detroit 

Seattle 

Portland 

San Francisco 

Seattle 

San Diego 

Chicago 

St. Louis 

St. Louis 

New York 

Atlanta 

Detroit 

San Francisco 

Portland 

Portland 

Houston 

San Francisco 

San Francisco 

San Francisco 

San Francisco 

San Francisco 

San Francisco 

Los Angeles 

Milwaukee 

Milwaukee 

Newark 

Phoenix 

Seattle 

Seattle 

Seattle 



401 



-8- 



LOCAL ( cont'd ) 



TOUCHE ROSS & CO. 
OFFICE 



Seattle, King County, Washington/Health Dept. 

Seattle, Washington/Management & Budget Office 

Seattle, Washington/METRO 

S.E. Michigan Trans. Authority 

Somers Point, New Jersey 

South Central Criminal Justice Region, Conn. 

Sparta, Michigan/Board of Education 

St. Louis, Missouri/Police Dept. 

Stanislaus County, California 

Stone Harbor, New Jersey 

Suffolk County, New York/Social Services Dept. 

Sweetwater, Texas/Water District 

Tacoma, Washington/Equipment Rental Division 

Tillanook County, Oregon 

Township of Alpine, Michigan 

Township of Tallina, Michigan 
Tulsa, Oklahoma/Housing Authority 

Turlock Irrigation District, California 

Tyler, Texas 

Urban West Housing Corp. 

Virginia Beach, Virginia/Health Dept. 

Waco, Texas 

Washington, D.C. /Emergency Medical Service 

Washington, D. C. /Suburban Sanitation 

Way land, Michigan 

Wayne County /Social Services Dept. 

West Allis, Wisconsin 

West Miami, Florida 

Wildwood, New Jersey 

Williamsport Redevelopment 

Woodbine Borough 

Worcester Regional 



Seattle 

Seattle 

Seattle 

Detroit 

Philadelphia 

Boston 

Grand Rapids 

St. Louis 

San Francisco 

Philadelphia 

New York 

Dallas 

Seattle 

Portland 

Grand Rapids 

Grand Rapids 

Kansas City 

San Francisco 

Dallas 

St. Louis 

Detroit 

Dallas 

Detroit 

Washington 

Grand Rapids 

Detroit 

Milwaukee 

Miami 

Philadelphia 

Philadelphia 

Philadelphia 

New York 



402 



Touche Ross & Co. 

15. Listing of federal departments, agencies, sub-divisions or 
authorities for which Touche Ross & Co. performed services during 
each year from January 1, 1970 through December 31, 1974. 



Fiscal Year Ended August 31, 1970 

Commerce, Department of 

HUD 

Labor, Department of 

Fiscal Year Ended August 31, 1971 

Agency for International Development 

HEW 

HUD 

Labor, Department of 

Fiscal Year Ended August 31, 1972 
Federal Communications Commission 
HEW, Social and Rehabilitation Service 
Labor, Department of 
National Bureau of Standards 
Office of Emergency Preparedness 
Price Commission 

Fiscal Year Ended August 31, 1973 

Board of Governors - Federal Reserve System 

Federal Communications Commission 

Federal Home Loan Bank Board 

HEW, Social and Rehabilitation Service 

HUD 

Justice, Department of 

Labor, Department of 

Office of Emergency Preparedness 

Price Commission 

Transportation, Department of 

Fiscal Year Ended August 31, 1974 

Board of Governors - Federal Reserve System 

Consumer Products Safety Commission 

Cost of Living Council 

Federal Energy Administration 

Federal Home Loan Bank Board 

HEW, Social and Rehabilitation Service 

HUD 

Justice, Department of 

Labor, Department of 

Social Security Administration 

Special Action Office on Drug Abuse Prevention 

Transportation, Department of 



403 



Fiscal Year Ended August 31, 1975 

Board of Governors - Federal Reserve System 

Executive Office of the President 

Federal Communications Commission 

Federal Energy Administration 

Federal Home Loan Bank Board 

HEW, Department of Medicaid 

HEW, Social and Rehabilitation Service 

Labor, Department of 

National Commission on Water Quality 



National Corporation for Housing Partnerships 

National Institute on Drug Abuse 

National Institute of Education 

Office of the Assistant Secretary of Defense/Health & Environment 

Special Action Office for Drug Abuse Prevention 

Transportation, Department of 

U.S. Department of the Army 



404 



ABRAHAM RIBICOFF, CONN., CHAIRMAN 

CHARLES H. PERCY, ILL. 
JACOB K. JAVtTS. N.Y. 
WILLIAM V. ROTH, JR., DEL. 
Blt_l_ BROCK, TENN. 
LOWELL P. WE1CKER, JR., CONN. 



JOHN L. MC CLELLAN, ARK. 
HENRY M. JACKSON. WASH. 
EDMUND S. MUSKIE, MAINE 
LEE METCALF, MONT. 
JAMES B. ALLEN, ALA, 
LAWTON CHILES. FLA. 
SAM NUNN, GA. 
JOHN GLENN, OHIO 



SUBCOMMITTEE: 
LEE METCALF. MONT., CHAIRMAN 
JOHN l_ MC CLELLAN, ARK. BILL BROCK, TENN. 

EDMUND S. MUSKIE, MAINE 
SAM NUNN, GA. 
JOHN GLENN, OHIO 



RICHARD A. WEGMAN 
CHIEF COUNSEL AND STAFF DIRECTOR 



^Cttttefc J&icdc* Senate 

COMMITTEE ON 

GOVERNMENT OPERATIONS 

SUBCOMMITTEE ON REPORTS, 

ACCOUNTING. AND MANAGEMENT 

(PURSUANT TO SEC. 7, S. RES. MS, MTH CONGRESS) 

WASHINGTON. D.C. Z05I0 



VIC RE1NEMER. STAFF DIRECTOR 

E. W1NSLOW TURNER. CHIEF COUNSEL 

101 RUSSELL BUILDING 

(202) 224-1474 



1 March, 1976 



Mr. Russell E. Palmer 

Touche Ross £ Co. 

1633 Broadway 

New York, New York 10019 

Dear Mr. Palmer: 



I have your response of 20 February to this 
subcommittee's accounting questionnaire. Your letter 
accompanying the response asks confidential treatment 
for all the information contained in the response. 

As a general policy, this subcommittee does not 
collect information for confidential use of its mem- 
bers and staff. Information collected is of the type 
which should properly be in the public domain so that 
Congress and the public may be informed. The account- 
ing questionnaire was specifically designed to avoid 
information which might be sensitive or affect the 
competitive standing of a firm. 

Six of the eight firms responding to the ques- 
tionnaire saw no need to request confidentiality, and 
the seventh requested limited confidentiality. In 
view of the open responses by other accounting firms 
and the need for authoritative information on the 
accounting profession by Congress and the public, I 
strongly urge that you reconsider your request for 
confidential treatment of your firm's response. 

Although the questionnaire and my letter of trans 
mittal offered no pledge of confidentiality for your 
response, I will honor your request if you should 
reaffirm it after reconsideration. However, that grant 



405 



Mr. Russell E. Palmer 
1 March, 1976 
Page Two 



of confidentiality shall be noted in any publications 
or proceedings which may be undertaken by this sub- 
committee regarding accounting matters, and shall not 
extend to any information which is obviously in the 
public domain. 

I shall appreciate a prompt response regarding 
reconsideration of the request for confidentiality. 

Very truly yours, 



Lee Metcalf 



406 



TOUCHE ROSS a CO. 

1633 BROADWAY 
NEW YORK. NEW YORK IOOI9 



RUSSELL E. PALMER 

Managing Partner March 15, 1976 



Honorable Lee Metcalf 
United States Senate 
Washington, D.C. 20510 

Dear Senator Metcalf: 

Thank you for your letter about our request 
for maintaining the confidentiality of the question- 
naire data. I assure you of our desire to cooperate 
with the Committee's needs with minimal attention to 
our own interests. In this spirit we will modify 
the confidentiality request as follows: 

1. The Committee is granted full and un- 
qualified right to use the data sub- 
mitted by Touche Ross in response to 
all questions. 

2. With respect to the financial infor- 
mation submitted in response to ques- 
tions 7E and 16, we prefer that any 
public disclosure be such that this 
information and comparable information 
from other accounting firms be collec- 
tively presented so that the Touche 
Ross component thereof is not separately 
identifiable . 

I am hopeful that this clearance will provide the 
Committee with all flexibility necessary for your pur- 
poses . 

Respectfully, 



REP/jr ^Pv 

MAX i V £7fe 





+ y * 


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V 
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/ 




\ 


-*> 



APPENDIX B 

THE LIBRARY OF CONGRESS 
Congressional Research Service 



WASHINGTON, D.C. 2CS-KJ 



NYSE AND AMSE CLIENTS OF 
THE BIG EIGHT ACCOUNTING FIRMS: 
SUMMARY FINANCIAL AND EMPLOYMENT DATA 



John Spriggs 

Economic Analyst 

Economics Division 

July 15, 1976 
(407) 



409 



NYSE AND AMSE CLIENTS OF 
THE BIG EIGHT ACCOUNTING FIRMS: 
SUMMARY FINANCIAL AND EMPLOYMENT DATA 



Table of Contents 

Page 

I . Background and Scope 1 

II . Summary of Financial and Employment Data 3 

Table 1 - Summary of Financial and Employment Data ... 7 

Table 1A - Number of Valid Entries For Data Category. . 8 

III . Clients Listed on the NYSE and AMSE 9 

Figure 1 - Number of Clients - NYSE and AMSE 11 

Figure 2 - Percentage of All Companies Listed on the 

Exchanges 12 

IV. Clients Financial and Employment Data 13 

Figure 3 - Sales of Clients - NYSE and AMSE 15 

Figure 4 - Percentage of Sales of All Companies 

Listed on the Exchanges 16 

Figure 5 - Net Income of Clients - NYSE and AMSE 17 

Figure 6 - Percentage of Net Income of All Companies 

Listed on the Exchanges 18 

Figure 7 - Income Taxes of Clients - NYSE and AMSE ... 19 

Figure 8 - Percentage of Income Taxes of All 

Companies Listed on the Exchanges 20 

Figure 9 - Number of Employees of Clients - NYSE and 

AMSE 21 

Figure 10 - Percentage of Employees of All Companies 

Listed on the Exchanges 22 

Figure 11 - Assets of Clients - NYSE and AMSE 23 

Figure 12 - Percentage of Total Assets of All 

Companies Listed on the Exchanges 24 



410 

Table of Contents (con't.) 

Page 

V. Fifty Largest Clients 25 

Table 2 - Ranked by Sales 27 

Table 3 - Ranked by Net Income 28 

Table 4 - Ranked by Income Taxes 29 

Table 5 - Ranked by Employees 30 

Table 6 - Ranked by Assets 31 

VI . CPA Firms in Selected Industries 32 

Table 7 - Natural Resources and Banks 34 

Table 8 - Chemicals and Drugs and 

Pharmaceuticals 35 

Table 9 - Machinery and Equipment and 

Electric Power Companies 36 

VII . Summary 3 7 

Attachment 1 38 

Attachment 2 

Attachment 3 



411 



NYSE AND AMSE CLIENTS OF 
THE BIG EIGHT ACCOUNTING FIRMS: 
SUMMARY FINANCIAL AND EMPLOYMENT DATA 



Background and Scope 

In December 1975 the Subcommittee on Reports, Accounting, 
and Management of the Senate Committee on Government Operations 
sent questionnaires to the "big eight" Certified Public Accounting 
(CPA) firms in an effort to obtain heretofore unavailable infor- 
mation. In response to one of the Subcommittee's questions, these 
firms provided lists of their clients on the New York Stock Exchange 
(NYSE) and the American Stock Exchange (AMSE). 1/ In May 1976 the 
Subcommittee requested that the Congressional Research Service (CRS) 
determine published financial and employment data for these clients 
of the "big eight" CPA firms and to summarize those data for further 
analysis and interpretation by the Subcommittee. 

In total 2,248 companies on the NYSE and the AMSE were claim' ' 
as clients of the big eight CPA firms, or approximately 85% of all 
companies listed on the NYSE and AMSE in 1974 (2,641 companies). 
Investors Management Sciences, Inc. (IMS), a subsidiary of Standard 
& Poor's Corporation, agreed to provide some financial and employ- 
ment data for those companies in its computer files which were listed 
on the NYSE and the AMSE. IMS provided data for 2,397 companies. 
Not all of the 2,248 clients of the "big eight" CPA firms were in- 
cluded in the IMS listing, therefore some 130 companies' financial 



1/ CRS understands that some of the client listings provided by 

the eight CPA firms to the Subcommittee were provided on a con- 
fidential basis. CRS has honored this confidentiality. 



67-159 O - 77 - 28 



412 



CRS-2 



and employment data had to be obtained from published information 
in Standard & Poor's Corporation Records. Still, no data were ob- 
tained for 155 clients. Therefore, approximately 7% of the clients 
reported by the "big eight" CPA firms are not included in this report 

CRS contracted with The Mitre Corporation of McLean, Virginia 
to combine the aforementioned financial and employment data with 
the reported client lists and to summarize the data according to 
CRS specified guidelines (see attachment 1 for the master list of 
clients and their data). This study presents the Mitre summary 
reports, highlights some significant aspects of the reports, and 
relates some of the information in the reports to certain economic 
data — namely, employment in nonagricultural-nongovernraent establish- 
ments, manufacturing, trade, and retail sales and corporate profits 
and corporate profits tax liability. 



413 

CRS-3 



Summary of Financial and Employment Data 

Financial and employment data were obtained for 2,093 clients 
of the big eight CPA firms. Table 1 is a summary of all the data 
by data category and by CPA firm. Data were not available for all 
2,093 companies in each data category, hence Table 1A shows the 
number of valid entries per data category (total number of clients 
for whom data were available). The five categories of financial 
and employment data are: 



1. Sales — net of excise taxes, sales taxes, etc. 

2. Net income—after income taxes, before dividends 

3. Income taxes — Federal, State, local, and foreign 

4. Number of employees 

5. Total assets 



It would be ideal to obtain the most up-to-date financial and 
employment information on all the clients, and to have all the 
companies' statistics and all the comparison statistics to coincide 
temporally. Unfortunately, these conditions cannot be achieved 
because companies do not have the same year-end reporting dates 
and aggregate statistics are usually compiled after a lag of a year 
or more. The range of reporting dates in the IMS data is from 
January 1974 to December 1975. Since any comparison of these data 
with final 1974 or final 1975 aggregate statistics would not be a 
fair comparison, these data will be compared with the average 
(arithmetic mean) of 1974 and 1975 aggregate statistics. 



414 



CRS-4 

Table 1 shows that the "big eight" CPA firms audit companies 
which employ at least 20.9 million people. In 1974 and 1975 the 
average number of employees in nonagricultural establishments was 
77.1 million persons. When the 14.6 million persons in Government 
establishments are subtracted, this leaves 62.5 million employees 
in nonagricultural-nongovernment establishments. 1/ From these 
data approximately 1/3 of the employees in the nonagricultural- 
nongovernment sector are employed by companies which are clients 
of the "big eight" CPA firms. 

Using the U.S. Department of Commerce's data for 1974 and 1975 
sales by manufacturing, trade, and retail stores (not adjusted for 
seasonal variations), the average annual sales for these sectors 
amounted to $2,552.1 billion. According to Table 1 approximately 1/2 
($1,350.2 billion) of the sales in the manufacturing, trade, and 
retail sectors are associated with clients of the "big eight" 
CPA firms. Furthermore, Commerce's revised January 1976 statistics 
show that corporate profits after taxes were $79.5 billion in 1974 
and $71.4 billion in 1975, for an annual average of $75.4 billion. 
Approximately 84% of these profits ($63.6 billion) are associated 
with the clients of these eight CPA firms. 

The same U.S. Department of Commerce statistics show "after 
tax liability" to be $52.6 billion and $45.7 billion for 1974 and 



1/ Source: U.S. Department of Labor, Bureau of Labor Statistics 



415 



CRS-5 

1975, respectively. The IMS financial and employment data show 
that these companies paid taxes in the amount of $60.4 billion 
during the period January 1974 - December 1975. While there may 
be some definitional differences between the Commerce data and 
the IMS data, one explanation could be that these companies are 
multinational in their operations and pay a significant (but not 
determinable from these data) amount of income taxes to foreign 
governments . 

These grand totals are impressive in absolute terms and in 
relation to the aggregate economic statistics thus far presented, 
especially since these data relate to the activity of only eight 
CPA firm's clients. Besides these grand totals, Table 1 also 
shows the averages for each data category. Much significance should 
not be placed on these averages at this time because specific clients 
will be examined in greater detail later in the report. Nevertheless, 
a quick glance at them does provide some information about which 
CPA firms have the largest clients on the average. 

In all five categories of financial and employment data, 
Price Waterhouse & Co . ' s clients appear to be larger on the average 
than the clients of each of the other CPA firms. Price Water- 
house & Co., Peat, Marwick, Mitchell & Co., and Arthur Anderson & 
Co. have more than 300 clients on the NYSE and AMSE , but in terms 
of average client financial and employment characteristics, Price 
Waterhouse & Co. stands above its professional counterparts. 



416 



CRS-6 

Given this background, the remaining sections of this report 
will provide a more detailed analysis of these client listings. 
Since these listings are broken down by NYSE and AMSE the more 
detailed study will begin by comparing the financial and employ- 
ment data of the clients listed on the exchanges. 



Z 



417 



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419 



CRS-9 



Clients Listed on the NYSE and the AMSE 

The NYSE reports that 1,543 companies' securities were listed 
on its exchange in 1974, while the AMSE reports that 1,098 companies' 
securities were listed on its exchange during the same period. 1/ 
Earlier it was noted that there were 2,248 companies listed on the 
NYSE and the AMSE which are clients of the big eight CPA firms. 
Our study of the client listings furnished by the eight CPA firms 
reveals that these firms had 1,417 clients on the NYSE and 831 
clients on the AMSE in 1974. 

Twenty-four companies were claimed as clients by at least two 
of the CPA firms. No effort was made to determine why these com- 
panies were claimed as clients by two firms. The list of these 
companies is available in Attachment 2. Table 1 shows the number 
of clients for which we have obtained financial and employment data. 
On the NYSE there were 94 clients for which we did not obtain data 
and on the AMSE there were 61 clients for which we did not obtain 
data. See Attachment 3 for the list of these companies by CPA firm. 
Using the client lists reported by the eight CPA firms, which in- 
cludes these clients for which we do not have data, Figure 1 graphi- 
cally displays the relationship between the big eight CPA firms 
and the number of clients on the exchanges. That is, in terms of 



1/ This information obtained directly from Thomas T. Murphy, editor 
of The New York Stock Exchange 1975 Fact Book , and from Colleen 
Reiner, Director of Marketing Research - American Stock Exchange 



420 



CRS-10 

their number of clients (on the NYSE and the AMSE) no one CPA 
firm clearly dominates. 

The 2,397 companies for which we received data and the 154 
companies for which we researched the data gave us data on 2,551 
companies listed on the NYSE and the AMSE. Adding the 155 com- 
panies for which we have no data to this total brings the total 
number of companies on the NYSE (1,562) and the AMSE (1,144) to 
2,706. Obviously, this is greater than the number of companies 
reported by the exchanges in 1974 (2,641). Since the IMS data 
cover the period from January 1974 to December 1975, this dis- 
crepancy is not a major cause of concern. 

Figure 2 relates the number of clients listed on the NYSE 
and the AMSE for each of the eight CPA firms to the total number 
of companies listed on the respective exchanges (as opposed to 
the "big eight" CPA firm's clients exclusively). Ninety and 
seven-tenths percent (90.7%) of all the companies listed on the 
NYSE are clients of the "big eight" CPA firms. Seventy-two and 
six-tenths percent (72.6%) of all the companies on the AMSE are 
clients of the "big eight" CPA firms. The dominance of the eight 
CPA firms is more pronounced on the NYSE where the Nation's "blue- 
chip stock" companies are registered. 



421 







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423 



CRS-j.3 

Clients Financial and Employment Data 

The bar graphs in Figures 3-12 show: (1) the absolute 
amounts of sales, net income, income taxes, number of employees, 
and total assets of clients for each of the eight CPA firms; 
(2) the percentage that these absolute amounts represent with 
respect to all of the clients of the eight CPA firms (for which 
we have data); and (3) these absolute amounts and percentages 
for the NYSE and the AMSE . 1/ The pie charts in Figures 3-12 
relate the financial and employment data categories for the clients 
listed on the exchanges to the corresponding data categories for 
all companies listed on each exchange (for which we have data). 

The clients of the big eight CPA firms account for a signifi- 
cant proportion of all the financial and employment data categories 
for listed companies on the NYSE and, to a lesser extent, for com- 
panies listed on the AMSE. For all the companies listed on the NYSE, 
the following percentages show what proportion of the respective 
data categories are associated with clients of the big eight firms: 



1. 93.7% of all sales (revenues) received 

2. 94.1% of all profits earned 

3. 89.9% of all income taxes paid 

4. 94.1% of all people employed 

5. 93.7% of all assets owned 



1/ The 2,397 companies for which we received data from IMS and the 
154 companies for which we researched the data gave us grand 
totals for the NYSE and the AMSE. These grand totals are the 
basis upon which these percentages are computed. To get these 
grand totals, sum the totals for each accounting firm and the 
"Other" group for each exchange. 



424 



CRS-14 

For all the companies listed on the AMSE, the following percentages 
show what proportion of the respective data categories are asso- 
ciated with clients of the big eight CPA firms: 

1. 66.9% of all sales (revenues) received 

2. 66.7% of all profits earned 

3. 65.8% of all income taxes paid 

4. 61.2% of all people employed 

5. 72.8% of all assets owned 

In looking at the performance of the clients of the eight CPA 
firms as represented by the NYSE graphs and charts, a recurring pat- 
tern emerges which indicates that these eight CPA firms can be grouped 
into three segments: (1) Price Waterhouse & Co.; (2) Arthur Andersen 
& Co . , Coopers and Lybrand, Haskins & Sells, and Peat, Marwick, 
Mitchell & Co.; and (3) Ernst & Ernst, Arthur Young & Company, and 
Touche Ross & Co. This same grouping is evident in the AMSE graphs 
and charts, but not with the clarity of the NYSE figures. 

Earlier in this report it was noted that Price Waterhouse & 
Co.'s clients appeared to be larger on the average than the client's 
of each of the other CPA firms. Figures 3-12 seem to corroborate 
this earlier observation. So far our study of these data has not 
yielded any insights into why this is the case. No financial or 
employment statistics in the summary appears to be significantly 
different with respect to Price Waterhouse & Co. Further research 
in this regard may reveal some determining factors or statistics 
which explain what appears to be "preeminence" of this firm, but now 
all one can do is note it without explaining any reasons. 






425 




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